As filed with the Securities and Exchange Commission on July 25, 2003.
Registration No. 333-______
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------
MAGNA ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
Delaware 7948 98-0208374
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
(905) 726-2462
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------
Gary M. Cohn
Vice-President, Special Projects
and Secretary
Magna Entertainment Corp.
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
(905) 726-2462
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------
Copies to:
Scott M. Freeman
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, New York 10019
(212) 839-5300
---------
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a Post-Effective Amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
---------
CALCULATION OF REGISTRATION FEE
================================ ======================= ======================= ======================= =======================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price per Aggregate Offering Amount of
Securities to be Registered Registered Note Price Registration Fee
- -------------------------------- ----------------------- ----------------------- ----------------------- -----------------------
8.55% Convertible Subordinated $150,000,000 (1) 100% (2) $150,000,000 (2) $12,135
Notes due June 15, 2010
- -------------------------------- ----------------------- ----------------------- ----------------------- -----------------------
Class A Subordinate Voting 21,276,595 (3) -- -- (4)
Stock, par value $0.01 per
share
================================ ======================= ======================= ======================= =======================
(1) Represents the aggregate principal amount at maturity of the notes that
were originally issued by the Registrant in June 2003.
(2) This estimate is made pursuant to Rule 457(c) of the Securities Act of
1933, as amended, solely for purposes of determining the registration fee.
(3) Represents the number of shares of Class A Subordinate Voting Stock that
are currently issuable upon conversion of the notes registered hereby at the
initial conversion rate of 141.844 shares for each $1,000 principal amount of
notes. In addition to the shares set forth in the table, pursuant to Rule 416
under the Securities Act of 1933, as amended, the amount to be registered
includes an indeterminate number of shares of Class A Subordinate Voting Stock
issuable upon the conversion of the notes, as this amount may be adjusted as a
result of stock splits, stock dividends and anti-dilution provisions.
(4) No separate consideration will be received for the shares of Class A
Subordinate Voting Stock issuable upon conversion of the notes and, therefore,
no registration fee is required pursuant to Rule 457(i) under the Securities
Act.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
The information in this prospectus is incomplete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
Subject to completion, dated July 25, 2003.
PROSPECTUS
MAGNA ENTERTAINMENT CORP.
$150,000,000
8.55% Convertible Subordinated Notes due June 15, 2010
Shares of Class A Subordinate Voting Stock
Issuable upon the Conversion of the Notes
---------
This prospectus relates to the offer and sale from time to time by
the selling securityholders named in this prospectus of up to $150,000,000
aggregate principal amount of our 8.55% Convertible Subordinated Notes due
June 15, 2010 and the shares of our Class A Subordinate Voting Stock issuable
upon conversion of the notes. Interest on the notes is payable on June 15 and
December 15 of each year, beginning December 15, 2003.
The prices at which the selling securityholders may sell the notes
and the shares of Class A Subordinate Voting Stock will be determined through
privately-negotiated transactions or by the prevailing market prices. We will
not receive any proceeds from the sale of any of the notes or the shares of
Class A Subordinate Voting Stock. We have agreed to bear the expenses of
registering the notes and the shares of Class A Subordinate Voting Stock
covered by this prospectus under federal and state securities laws.
The notes and the shares of Class A Subordinate Voting Stock are
being registered to permit the selling securityholders to sell the notes and
the shares of Class A Subordinate Voting Stock from time to time in the public
market. The selling securityholders may sell the shares of Class A Subordinate
Voting Stock through ordinary brokerage transactions on the Nasdaq National
Market or the Toronto Stock Exchange or, in the case of either the notes or
the shares of Class A Subordinate Voting Stock, through any other means
described in the section titled "Plan of Distribution". We do not know when
the selling securityholders may offer the notes or the shares of Class A
Subordinate Voting Stock for sale. The selling securityholders may sell any,
all or none of the notes and shares of Class A Subordinate Voting Stock
offered by this prospectus.
The notes are redeemable on and after June 2, 2006, at any time in
whole or in part, at our option on not less than 20 and not more than 60 days'
prior notice at a redemption price equal to the principal amount thereof plus
accrued and unpaid interest, if any, to the date of redemption. See
"Description of the Notes -- Optional Redemption".
The notes are convertible at the option of the holder, unless
previously redeemed, at any time prior to the business day preceding the date
of maturity, initially into approximately 141.844 shares of our Class A
Subordinate Voting Stock for each $1,000 principal amount of notes, which is
equivalent to an initial conversion price of $7.05 per share of our Class A
Subordinate Voting Stock.
The notes are unsecured obligations of Magna Entertainment Corp. and
are subordinated in right of payment to all existing and future senior
indebtedness of Magna Entertainment Corp. and, in effect, to all existing and
future obligations of Magna Entertainment Corp.'s subsidiaries. The notes rank
pari passu in right of payment with our $75,000,000 aggregate principal amount
of 7 1/4% Convertible Subordinated Notes due December 15, 2009.
Our Class A Subordinate Voting Stock is traded on the Nasdaq National
Market under the symbol "MECA" and on the Toronto Stock Exchange under the
symbol "MEC.A".
Investing in the notes or shares of Class A Subordinate Voting Stock
involves risks. See "Risk Factors" beginning on page 4.
Neither the Securities and Exchange Commission ("SEC") nor any State
Securities Commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
The date of this prospectus is __________, 2003.
1
OUR COMPANY
We are North America's number one owner and operator of horse
racetracks, based on revenue, and one of the world's leading suppliers, via
simulcasting, of live racing content to the growing inter-track, off-track and
account wagering markets. We currently operate or manage eleven thoroughbred
racetracks, two standardbred racetracks, one racetrack that runs both
thoroughbred and standardbred meets and one greyhound track in North America,
as well as the simulcast wagering venues at these tracks. In addition, we
operate off-track betting ("OTB") facilities and a national account wagering
business known as XpressBet(TM), which permits customers to place wagers by
telephone and over the Internet on horse races at up to 70 racetracks in North
America. We also own and operate HorseRacing TV(TM), a new television network
focused exclusively on horse racing that we initially launched on the
Racetrack Television Network ("RTN") in 2002. HorseRacing TV(TM) is currently
carried on cable systems in eight states, with over one million subscribers to
date. We are in ongoing discussions with cable and satellite operators with
the goal of achieving broader distribution for HorseRacing TV(TM) . RTN, in
which we have a one-third interest, was formed to telecast races from our
racetracks and other racetracks, via private direct-to-home satellite, to
paying subscribers.
On July 7, 2003, Magna International Inc. ("Magna International")
announced that, subject to shareholder approval at a special meeting of Magna
International's shareholders scheduled for August 19, 2003, Magna
International proposes to spin-off to its shareholders 100% of its
wholly-owned subsidiary, MI Developments Inc. ("MI Developments"), which would
thereafter be a publicly held company owning substantially all Magna
International's automotive real estate and all its holdings in MEC. After the
completion of such proposed spin-off, we would be controlled by MI
Developments, rather than Magna International, and both Magna International
and MI Developments would be ultimately controlled by the Stronach Trust. MI
Developments' real estate business will include real estate assets with an
aggregate net book value of approximately $1.1 billion as at March 31, 2003,
including an income-producing property portfolio consisting of 106 properties
with a total leasable area of approximately 24 million square feet.
All references to "we", "us", "our", or "MEC" in this prospectus are
to Magna Entertainment Corp. and its subsidiaries, unless the context requires
otherwise. All references in this prospectus to dollar amounts are to U.S.
dollars, unless otherwise stated. All references to Magna International's
ownership and/or control of MEC in this prospectus shall, upon the completion
of the proposed spin-off by Magna International of MI Developments, be deemed
to refer to MI Developments, which thereafter will control MEC. See "Risk
Factors - We are controlled by Magna International and therefore Magna
International is able, and after the completion of the proposed spin-off of MI
Developments by Magna International, MI Developments will be able, to prevent
any takeover of us by a third party".
THE OFFERING
Issuer: Magna Entertainment Corp.
Securities Offered: $150,000,000 in principal
amount of 8.55% Convertible
Subordinated Notes due June
15, 2010 (which we refer to as
the notes).
Maturity: June 15, 2010.
Interest Payment Dates: June 15 and December 15 of
each year, beginning December
15, 2003 (or if any of those
days is not a business day,
the next succeeding business
day without accrual of
additional interest as a
result of the delay in
payment).
Conversion: The notes are convertible at
the option of the holder,
unless previously redeemed, at
any time prior to the business
day preceding
2
the date of maturity,
initially into approximately
141.844 shares of our Class A
Subordinate Voting Stock for
each $1,000 principal amount
of notes, which is equivalent
to an initial conversion price
of $7.05 per share of our
Class A Subordinate Voting
Stock. The conversion price
may be adjusted as described
in this prospectus. See
"Description of the Notes--
Conversion of Notes".
Optional Redemption: The notes are redeemable on
and after June 2, 2006, at any
time in whole or in part, at
our option on not less than 20
and not more than 60 days'
prior notice at a redemption
price equal to the principal
amount thereof plus accrued
and unpaid interest, if any,
to the date of redemption;
provided that, in connection
with any redemption of the
notes occurring on or after
June 2, 2006 and until June 2,
2008, the closing price of our
Class A Subordinate Voting
Stock has exceeded 125% of the
conversion price for at least
20 trading days in the
30-consecutive-trading
day-period ending on the
trading day prior to the
mailing of the notice of
redemption. See "Description
of the Notes-- Optional
Redemption".
Subordination: The notes are our direct
unsecured obligations ranking
subordinate in right of
payment to all our existing
and future senior indebtedness
and, in effect, to all
existing and future
obligations of our
subsidiaries. The notes will
rank pari passu in right of
payment with our $75.0 million
aggregate principal amount of
7 1/4% Convertible
Subordinated Notes due
December 15, 2009. At March
31, 2003, our outstanding
senior indebtedness was
approximately $62.0 million,
and the aggregate outstanding
obligations of our
subsidiaries was approximately
$250.1 million. See
"Description of the Notes--
Subordination of Notes".
Purchase of Notes at Your Option upon a If there is a change in
Change in Control: control with respect to us,
you will have the right to
require us to purchase all or
any part of the notes 30
business days after the
occurrence of the change in
control at a purchase price
equal to the principal amount
thereof plus accrued and
unpaid interest, if any, to
the date of purchase. See
"Description of the Notes --
Purchase of Notes at Your
Option upon a Change in
Control".
Form of the Notes: The notes were issued in
book-entry form and are
represented by one or more
permanent global securities
deposited with and registered
in the name of the common
depository for Euroclear Bank
S.A./N.V. ("Euroclear") and
Clearstream Banking, societe
anonyme, Luxembourg
("Clearstream").
Trading: The notes are not listed on
any exchange and we do not
intend to apply to list the
notes on any exchange. The
currently outstanding shares
of Class A Subordinate Voting
Stock are listed on the Nasdaq
National Market under the
symbol "MECA" and on the
Toronto Stock Exchange under
the symbol "MEC.A".
Use of Proceeds: We will not receive any of the
proceeds from the sale by any
selling securityholder of the
notes or shares of Class A
Subordinate Voting Stock
offered under this prospectus.
Risk Factors: Before making an investment in
the notes or shares of our
Class A Subordinate Voting
Stock, you should carefully
consider the risks discussed
under the heading "Risk
Factors" starting on page 4.
3
RISK FACTORS
You should carefully consider the following factors in addition to
the other information contained in this prospectus before purchasing any notes
or shares of Class A Subordinate Voting Stock.
If any of the following risks, or any of the risks described in the
other documents we file with the SEC and the Canadian securities regulatory
authorities, actually occur, our business, financial condition, operating
results and prospects could be materially adversely affected. In that case,
the trading price of the notes and shares of our Class A Subordinate Voting
Stock could decline substantially and investors may lose all or part of the
value of the notes and shares of our Class A Subordinate Voting Stock held by
them.
Additional information concerning many of the risks described below
is contained in our Annual Report on Form 10-K for the year ended December 31,
2002, which is incorporated into this prospectus by reference. See
"Incorporation by Reference" and "Additional Information".
Risks Regarding the Notes
The notes are subordinated in right of payment to all existing and
future senior indebtedness of Magna Entertainment Corp. and, in effect, to all
existing and future obligations of Magna Entertainment Corp.'s subsidiaries.
The notes are direct unsecured obligations of Magna Entertainment
Corp. ranking subordinate in right of payment to all existing and future
senior indebtedness of Magna Entertainment Corp. and, in effect, to all
existing and future obligations of Magna Entertainment Corp.'s subsidiaries.
The notes rank pari passu in right of payment with our $75.0 million aggregate
principal amount of 7 1/4% Convertible Subordinated Notes due December 15,
2009. As of March 31, 2003, the outstanding senior indebtedness of Magna
Entertainment Corp. was approximately $62.0 million, and the aggregate
outstanding obligations of Magna Entertainment Corp.'s subsidiaries was
approximately $250.1 million. In the event of a bankruptcy, liquidation or
reorganization of Magna Entertainment Corp. or any of its subsidiaries,
holders of existing or future secured or unsecured and unsubordinated
obligations of Magna Entertainment Corp. or its subsidiaries, including trade
creditors of the subsidiaries, will be entitled to payments of their claims
prior to any payments to the holders of the notes, and there may not be
sufficient assets remaining to pay amounts due on any or all of the
outstanding notes. In addition, the rights of the holders to receive payments
or to pursue remedies upon an event of default under the indenture will be
substantially limited. See "Description of the Notes -- Subordination of
Notes".
An active or liquid trading market for your notes may not develop or
continue; thus, it may be difficult to resell your notes.
There is no established trading market for the notes. Bank Austria
Creditanstalt AG, the initial purchaser, may make a market in the notes and
assist in their resale, but is not obligated to do so. Any market making
activity, if initiated, may be discontinued at any time, for any reason,
without notice. If the initial purchaser ceases to act as a market maker for
the notes for any reason, we cannot assure you that another firm or person
will make a market in the notes. The liquidity of any market for the notes
will depend upon the number of holders of the notes, our results of operations
and financial condition, the market for similar securities, the interest of
securities dealers in making a market in the notes and other factors. An
active trading market for your notes may not develop or be sufficiently liquid
to allow you to resell your notes.
Even if a market were to develop, it might not continue and, in
either case, the notes could trade at prices that may be lower than their
initial offering price depending on many factors, including the market price
of our shares of Class A Subordinate Voting Stock into which the notes are
convertible, prevailing interest rates, our operating results and the market
for similar securities.
4
The notes are not protected by restrictive covenants.
The indenture governing the notes does not contain any financial
covenants or restrictions on the payment of dividends, the incurrence of
indebtedness or the issuance or repurchase of securities by us or our
subsidiaries. The indenture contains no covenants or other provisions to
afford you protection in the event of a change in control except as described
under "Description of the Notes -- Purchase of Notes at Your Option upon a
Change in Control".
We may not have the ability to repurchase the notes in the event of a
change in control.
Upon the occurrence of a change in control, we would be required
under the indenture governing the notes to offer to repurchase all the
outstanding notes. We may not have sufficient financial resources, and may not
be able to arrange financing, to pay the repurchase price for all notes
tendered by the holders. A change in control would also constitute an event of
default under our credit agreement, which would prohibit us from repurchasing
any notes. Any future credit agreements or other agreements relating to other
indebtedness to which we become a party may contain similar restrictions and
provisions. If we do not obtain a consent to the repurchase of the notes upon
a change in control, we may remain prohibited from repurchasing the notes. Any
failure to repurchase the notes when required following a change in control
would result in an event of default under the indenture, which could lead to
the acceleration of all amounts on the notes, and may also trigger
cross-default provisions, resulting in acceleration of our other indebtedness.
See "Description of the Notes -- Purchase of Notes at Your Option upon a
Change in Control".
Risks Regarding Our Company
We are a relatively new company with a short history of racetrack
operations. We must successfully integrate recent racetrack acquisitions or
our operating results may be adversely affected.
We were incorporated approximately four years ago and acquired our
first racetrack in December 1998. Accordingly, although all our racetracks
have been in operation for some time, we have a relatively short history of
owning and operating racetracks. The acquisition of Santa Anita Park was
completed in December 1998, the acquisition of Gulfstream Park was completed
in September 1999, the acquisition of Remington Park and Thistledown was
completed in November 1999, the acquisition of Golden Gate Fields was
completed in December 1999, the acquisition of Great Lakes Downs was completed
in February 2000, the acquisition of Bay Meadows was completed in November
2000, the acquisition of The Meadows was completed in April 2001, the
acquisition of Multnomah Greyhound Park was completed in October 2001, the
acquisition of Lone Star Park at Grand Prairie was completed in October 2002,
the acquisition of Pimlico Race Course and Laurel Park was completed in
November 2002 and the acquisition of Flamboro Downs was completed in April
2003. The Portland Meadows facility commenced operations under our management
in July 2001 and we assumed the management of the racing operations of
Colonial Downs in November 2002. Maronas, the national racetrack of Uruguay,
located in Montevideo, re-opened with our assistance in June 2003. Prior to
their respective acquisitions or management agreements with us, most of these
racetracks had been operated separately under different ownership. Completing
the integration of these businesses into our operations will require a
significant dedication of management resources and further expansion of our
information and other operating systems.
If we do not successfully integrate our recent acquisitions and any
future acquisitions, or if this integration consumes a disproportionate amount
of our management's time, then these acquisitions may materially adversely
affect our efficiency and, therefore, significantly harm our business.
We may not be able to obtain financing or may be able to obtain it
only on unfavorable terms, which may affect the viability of our expansion and
improvement projects or make expansion and improvement more costly.
We may require substantial additional financing in order to expand
and improve our operations, including financing related to alternative gaming
facilities, if any such opportunities are available to us. It is possible that
5
this financing will not be available or, if available, will not be available
on terms that are favorable to us. Our $100 million unsecured revolving credit
facility with a Canadian chartered bank was reduced to $50 million on April
30, 2003, and matures on October 10, 2003. As of March 31, 2003, we had no
borrowings under this facility but had issued letters of credit totaling $20.2
million under such facility. There can be no assurance that the amounts, terms
and conditions involved in a renewal of the facility will be favorable, or
that we will be able to renew the facility at all. Our controlling
stockholder, Magna International, has made a commitment to its shareholders
that it will not, before June 1, 2006, make any further debt or equity
investments in, or otherwise provide financial assistance to, us or any of our
subsidiaries without the prior consent of the holders of a majority of Magna
International's subordinate voting shares. If we are unable to obtain
financing on favorable terms, or at all, we may not be able to expand and
improve our operations, which could have a material adverse effect on our
future profitability.
Our revolving credit facility with a Canadian chartered bank imposes
important restrictions on us.
Our revolving credit facility with a Canadian chartered bank requires
us to maintain a debt to earnings before interest, taxes, depreciation and
amortization ratio not greater than 3.5 to 1, and an interest coverage ratio
not lower than 1.7 to 1, each as calculated under the facility. The credit
agreement also contains customary covenants relating to our ability to incur
additional indebtedness, make future acquisitions, enter into certain related
party transactions, consummate asset dispositions, incur capital expenditures
and make restricted payments. In addition, the credit agreement requires us to
use the first $75 million of net cash proceeds of any public debt or equity
offering to repay the loans outstanding under the facility. These restrictions
may limit our ability to expand, pursue our business strategies and obtain
additional funds. Our ability to meet these financial ratios and comply with
these covenants may be affected by changes in business conditions or results
of operations, adverse regulatory developments and other events beyond our
control. We cannot assure you that we will meet these financial ratios or
continue to comply with these covenants. Failure to comply with these
restrictions may result in the occurrence of an event of default under the
credit facility. Upon the occurrence of an event of default, the lender may
terminate the credit facility and demand immediate payment of all amounts
borrowed by us under that facility, which could adversely affect our ability
to repay our debt securities, including the notes, and would adversely affect
the trading price of our Class A Subordinate Voting Stock.
We have recruited most of our senior executive officers from outside
the racetrack industry.
Although our management personnel at our racetracks generally have
extensive experience in the racetrack industry, we have recruited most of our
senior executive officers from outside the industry. Our chief executive
officer, chief operating officer and executive vice-presidents, including our
chief financial officer, each joined us during the last three years from
outside the industry. This lack of racetrack industry experience may impede
the implementation of our strategy and slow our growth.
Our recent operating income includes gains from the sale of non-core
real estate, which sales may soon be completed, causing our future operating
income and cash flow to decrease.
Approximately 9% of our earnings before interest, taxes, depreciation
and amortization, before write-downs, for the year ended December 31, 2002
resulted from gains from non-core real estate sales. These gains will likely
be reduced to zero over the next two years as we endeavor to sell the balance
of our non-core real estate portfolio. Additionally, our short-term and annual
operating income and cash flow may decline from the prior year due to
decreases in non-core real estate sales. If we do not replace these gains or
offset these decreases with additional operating income and cash flow from our
racetrack operations and other sources, our future operating income and cash
flow will decline.
Our business is heavily concentrated at certain of our racetracks.
Four of our racetracks, Santa Anita Park, Gulfstream Park, Golden
Gate Fields and Bay Meadows, accounted for approximately 64% of our revenue
and 197% of our earnings before interest, taxes, depreciation and
amortization, before write-downs, for the year ended December 31, 2002. If a
business interruption were to occur
6
and continue for a significant length of time at any of these racetracks, it
could adversely affect our operating results. Additionally, certain of our
other racetrack properties have experienced operating losses before interest,
income taxes, depreciation and amortization over the past three years. The
operating performance of these racetracks may not improve in the future.
We are controlled by Magna International and therefore Magna
International is able, and after the completion of the proposed spin-off of MI
Developments by Magna International, MI Developments will be able, to prevent
any takeover of us by a third party.
Magna International owns all our Class B Stock, which is generally
entitled to 20 votes per share, and therefore is able to exercise
approximately 96% of the total voting power of our outstanding stock. It is
therefore able to elect all our directors and to control us. As a result,
Magna International is able, and after the completion of the proposed spin-off
of MI Developments by Magna International, MI Developments will be able, to
cause or prevent a change in our control. See "Description of Capital Stock -
Takeover Protection" and "Our Company".
Our relationship with Magna International and MI Developments is not
at "arm's length", and therefore Magna International and, after the completion
of the proposed MI Developments spin-off by Magna International, MI
Developments, may influence us to make decisions that are not in the best
interests of our other stockholders.
Our relationship with each of Magna International and MI
Developments is not at "arm's length". In addition to the ownership of our
stock as described in the preceding risk factor, two members of our board of
directors are also members of Magna International's board of directors and we
have the same chairman as Magna International and MI Developments. In some
cases, the interests of Magna International or MI Developments, as applicble,
may not be the same as those of our other stockholders, and conflicts of
interest may arise from time to time that may be resolved in a manner
detrimental to us or our minority stockholders. Magna International is able
to, and after the completion of the proposed MI Developments spin-off, MI
Developments will be able to, cause us to effect certain corporate
transactions without the consent of the holders of our Class A Subordinate
Voting Stock, subject to applicable law and the fiduciary duties of our
directors and officers. Consequently, transactions effected between us and
Magna International or MI Developments, as applicable, may not be on the same
terms as could be obtained from independent parties, resulting in the
possibility of our minority stockholders' interests being compromised. See
"Our Company".
If we do not identify, negotiate and complete a sufficient number of
strategic acquisitions, we may not achieve our business plan and our growth
prospects may suffer.
Our current business plan calls for us to continue to selectively
pursue strategic acquisitions. Our future profitability will depend to some
degree upon the ability of our management to identify, complete and
successfully integrate commercially viable acquisitions. If we do not do so
for any reason, we may not be able to implement our business plan
successfully, or grow as quickly as we anticipate, and this could have a
material adverse effect on our future profitability.
We are exposed to currency exchange rate fluctuations.
Our business outside the United States is generally transacted in
currencies other than U.S. dollars. Fluctuations in currencies relative to the
U.S. dollar may make it more difficult to perform period-to-period comparisons
of our operating results. Moreover, fluctuations in the U.S. dollar relative
to currencies in which earnings are generated outside the United States could
result in a reduction in our profitability as reported in U.S. dollars.
7
Risks Relating to Our Gaming Operations
A decline in the popularity of horse racing could adversely impact
our business.
The continued popularity of horse racing is important to our growth
plans and our operating results. Our business plan anticipates our attracting
new customers to our racetracks, off-track betting facilities and account
wagering operations. Even if we are successful in making acquisitions and
expanding and improving our current operations, we may not be able to attract
a sufficient number of new customers to achieve our business plan. Public
tastes are unpredictable and subject to change. Any decline in interest in
horse racing or any change in public tastes may adversely affect our revenues
and, therefore, our operating results.
Declining on-track attendance and increasing competition in
simulcasting may materially adversely affect our operating results.
There has been a general decline in the number of people attending
and wagering at live horse races at North American racetracks due to a number
of factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance at
live horse racing events has prompted racetracks to rely increasingly on
revenues from inter-track, off-track and account wagering markets. The
industry-wide focus on inter-track, off-track and account wagering markets has
increased competition among racetracks for outlets to simulcast their live
races. A continued decrease in attendance at live events and in on-track
wagering, as well as increased competition in the inter-track, off-track and
account wagering markets, could lead to a decrease in the amount wagered at
our facilities and on races conducted at our racetracks and may materially
adversely affect our business, financial condition, operating results and
prospects.
Our gaming activities are dependent on governmental regulation and
approvals. Amendments to such regulation or the failure to obtain such
approvals could adversely affect our business.
All our pari-mutuel wagering operations are contingent upon the
continued governmental approval of these operations as forms of legalized
gaming. All our current gaming operations are subject to extensive
governmental regulation and could be subjected at any time to additional or
more restrictive regulation, or banned entirely.
We may be unable to obtain, maintain or renew all governmental
licenses, registrations, permits and approvals necessary for the operation of
our pari-mutuel wagering and other gaming facilities. Licenses to conduct live
horse racing and simulcast wagering must be obtained from each jurisdiction's
regulatory authority, in many cases annually. The denial, loss or non-renewal
of any of our licenses, registrations, permits or approvals may materially
limit the number of races we conduct or the form or types of pari-mutuel
wagering we offer, and could have a material adverse effect on our business.
In addition, we currently devote significant financial and management
resources to complying with the various governmental regulations to which our
operations are subject. Any significant increase in governmental regulation
would increase the amount of our resources devoted to governmental compliance,
could substantially restrict our business, and could materially adversely
affect our operating results.
The passage of legislation permitting alternative gaming at
racetracks, such as slot machines, video lottery terminals and other forms of
non-pari-mutuel gaming, can be a long and uncertain process. A decision to
prohibit, delay or remove alternative gaming rights at racetracks by the
government or the citizens of a state, or other jurisdiction, in which we own
or operate a racetrack, could adversely affect our business or prospects.
There has been speculation, by members of the media, investment
analysts and our employees and other representatives, as to the probability
and potential impact of the passage of legislation permitting alternative
gaming at racetracks in various states in the United States. This has been
especially prevalent in recent months
8
with the conclusion of the mid-term elections in November 2002, and as
alternative gaming at racetracks has become an issue for consideration in some
states.
While certain candidates who publicly advocated alternative gaming
at racetracks were elected, there can be no assurance that alternative gaming
at racetracks will become permitted in those states, or if it does, what the
timetable, conditions, terms of income or revenue sharing, or other
feasibility factors will be. It is possible that public reaction or other
factors may cause these persons to change their stance on this issue or call
for a public referendum to determine whether and how to proceed. It is also
difficult to predict accurately which issues will become priority agenda items
during a legislative session.
In the event that alternative gaming legislation is enacted in a
given state or other jurisdiction, there can be no certainty as to the terms
of such legislation or regulations, including the timetable for commencement,
the conditions and feasibility of operation and whether alternative gaming
rights are to be limited to racetracks. If we were to proceed to conduct
alternative gaming in such a situation, there may be significant costs and
other resources to be expended, and there will be significant risks involved,
including the risk of changes in the enabling legislation, that may have a
material adverse effect on the relevant racetrack's operations and
profitability.
The regulatory risks and uncertainties that are inherent in the
conduct of alternative gaming also apply in other jurisdictions outside the
United States. In the province of Ontario, the location of Flamboro Downs,
racetracks are permitted to serve as landlord to slot operations conducted by
a government corporation. Under that arrangement, the racetrack retains 20% of
the "net win" (slot machine revenues minus payout to slot players), with
one-half of that amount distributed to the horsemen and the other half being
retained by the racetrack owner. There can be no assurance as to how long this
arrangement will continue, or, if it does, whether the terms will remain the
same. Similarly, we commenced development of a horse racetrack combined with a
gaming and entertainment center on property located approximately 15 miles
south of Vienna, Austria, in anticipation of concluding joint venture
negotiations with an Austrian third party and receiving the requisite racing
and gaming licenses. Ultimately, those negotiations may not be successful or
we may not obtain the necessary licenses. If we are unable to complete this
development as planned, we may record a substantial write-down of the carrying
value of this property.
Any future expansion of our gaming operations will likely require us
to obtain additional governmental approvals or, in some cases, amendments to
current laws governing such activities.
The high degree of regulation in the gaming industry is a significant
obstacle to our growth strategy, especially with respect to account wagering,
including telephone, interactive television and Internet-based wagering.
Account wagering may currently be conducted only through hubs or bases located
in certain states. Our expansion opportunities in this area will be limited
unless more states amend their laws to permit account wagering or, in the
alternative, if states take action to make such activities unlawful. In
addition, the licensing and legislative amendment processes can be both
lengthy and costly, and we may not be successful in obtaining required
licenses, registrations, permits and approvals.
In the past, certain state attorneys general, district attorneys and
other law enforcement officials have expressed concern over the legality of
interstate account wagering. In December 2000, legislation was enacted in the
United States that amends the Interstate Horseracing Act of 1978. We believe
that this amendment clarifies that inter-track simulcasting, off-track betting
and account wagering, as currently conducted by the U.S. horse racing
industry, are authorized under U.S. federal law. The amendment may not be
interpreted in this manner by all concerned, however, and there may be
challenges to these activities by both state and federal law enforcement
authorities, which could have a material adverse impact on our business,
financial condition, operating results and prospects.
From time to time, the United States Congress has considered
legislation that would either inhibit or restrict Internet gambling in general
or inhibit or restrict the use of certain financial instruments, including
credit cards, to provide funds for account wagering. For example, in May 2001,
the United States Senate Commerce Committee approved a bill, in the form of
the Unlawful Internet Gambling Funding Prohibition Act, which, if
9
enacted, would have prohibited financial institutions from enforcing credit
card debts if they knew the debts were being incurred in order to gamble
illegally through the Internet. Further, on June 13, 2003, the United States
House of Representatives approved a bill that, if enacted, would prohibit the
use of credit cards, checks, electronic funds transfers and certain other
funding methods for internet gambling. While this recent bill was passed with
an exemption for lawful transactions with a business licensed or authorized by
a state, similar bills have been introduced this year in both the United
States House of Representatives and the United States Senate, at least one of
which did not contain an exemption for horse racing. Although it is difficult
to predict the ultimate chances for passage of any given legislation, it is
anticipated that legislation will continue to be introduced in the United
States Congress or elsewhere that will seek to restrict, regulate or
potentially ban altogether Internet gambling. Furthermore, even in the absence
of legislation, certain financial institutions have begun to block the use of
credit cards issued by them for Internet gambling, either voluntarily or as
part of a settlement with the office of the Attorney General for New York.
Legislation or actions of this nature, if enacted or implemented without
providing for a meaningful exception to allow account wagering to be conducted
as it is currently being conducted by the U.S. horse racing industry, could
inhibit account wagering by restricting or prohibiting its use altogether or,
at a minimum, by restricting or prohibiting the use of credit cards and other
commonly used financial instruments to fund wagering accounts. If enacted or
implemented, these or any other forms of legislation or practices restricting
account wagering could cause our business and its growth to suffer.
Implementation of some of the recommendations of the National
Gambling Impact Study Commission may harm our growth prospects.
In August 1996, the United States Congress established the National
Gambling Impact Study Commission to conduct a comprehensive study of the
social and economic effects of the gambling industry in the United States.
This commission reviewed existing federal, state and local policy and
practices with respect to the legalization or prohibition of gambling
activities with the aim of formulating and proposing changes in these policies
and practices and recommending legislation and administrative actions for
these proposed changes. On April 28, 1999, the Commission voted to recommend
that there be a pause in the expansion of gaming. On June 18, 1999, the
Commission issued a report setting out its findings and conclusions, together
with recommendations for legislation and administrative actions. Some of the
recommendations were:
o prohibiting Internet gambling that was not already authorized within
the United States or among parties in the United States and any
foreign jurisdiction;
o limiting the expansion of gambling into homes through such mediums as
account wagering; and
o banning the introduction of casino-style gambling into pari-mutuel
facilities for the primary purpose of saving a pari-mutuel facility
that the market has determined no longer serves the community or for
the purpose of competing with other forms of gaming.
The recommendations made by the National Gambling Impact Study
Commission could result in the enactment of new laws and/or the adoption of
new regulations in the United States, which would materially adversely impact
the gambling industry in the United States in general or our segment in
particular and consequently may threaten our growth prospects.
We face significant competition from other racetrack operators,
including those in states where more extensive gaming options are authorized,
which could hurt our operating results.
We face significant competition in each of the jurisdictions in which
we operate racetracks and we expect this competition to intensify as new
racetrack operators enter our markets and existing competitors expand their
operations and consolidate management of multiple racetracks. In addition, the
introduction of legislation enabling slot machines or video lottery terminals
to be installed at racetracks in certain states allows those racetracks to
increase their purses and compete more effectively with us for horse owners,
trainers and customers. One of our competitors, Churchill Downs Inc., has been
in operation for a much longer period of time than we have and may
have
greater name recognition. Competition from existing racetrack operators, as
well as the addition of new competitors, may hurt our future performance and
operating results.
10
In addition, Florida tax laws have historically discouraged the
three Miami-area horse racetracks, Gulfstream Park, Hialeah Park (which no
longer hosts live racing) and Calder Race Course, from scheduling concurrent
races. A change in the tax structure, effective as of July 1, 2001, has
eliminated this deterrent. As a result, our Gulfstream Park racetrack may face
direct competition from other Miami-area horse racetracks in the future. This
competition could significantly affect the operating results of Gulfstream
Park which could reduce our overall profitability.
Competition from non-racetrack gaming operators may reduce the amount
wagered at our facilities and materially adversely affect our operating
results.
We compete for customers with casinos, sports wagering services and
other non-racetrack gaming operators, including government-sponsored
lotteries, which benefit from numerous distribution channels, including
supermarkets and convenience stores, as well as from frequent and extensive
advertising campaigns. We do not enjoy the same access to the gaming public or
possess the advertising resources that are available to government-sponsored
lotteries as well as some of our other non-racetrack competitors, which may
adversely affect our ability to compete effectively with them.
We currently face significant competition from Internet and other
forms of account wagering, which may reduce our profitability.
Internet and other account wagering gaming services allow their
customers to wager on a wide variety of sporting events and casino games from
home. The National Gambling Impact Study Commission's June 1999 report
estimated that there were over 250 on-line casinos, 64 lotteries, 20 bingo
games and 139 sports wagering services offering gambling over the Internet.
Total industry-wide Internet gaming revenues are estimated to have grown from
approximately $1.1 billion in 1999 to approximately $2.5 billion in 2001,
according to Bear, Stearns & Co. Inc. in its 2002-2003 North American Gaming
Almanac. That report also estimates 2002 total industry-wide Internet gaming
revenues at $3.5 billion and projects a 2003 level of $4.2 billion. Although
many on-line wagering services are operating from offshore locations in
violation of U.S. law by accepting wagers from U.S. residents, they may divert
wagering dollars from legitimate wagering venues such as our racetracks and
account wagering operations. Moreover, our racetrack operations generally
require greater ongoing capital expenditures in order to expand our business
than the capital expenditures required by Internet and other account wagering
gaming operators. Currently, we cannot offer the diverse gaming options
provided by many Internet and other account wagering gaming operators and may
face significantly greater costs in operating our business. Our inability to
compete successfully with these operators could hurt our business.
In addition, the market for account wagering is affected by changing
technology. Our ability to anticipate such changes and to develop and
introduce new and enhanced services on a timely basis will be a significant
factor in our ability to expand, remain competitive and attract new customers.
Expansion of gaming conducted by Native American groups may lead to
increased competition in our industry, which may negatively impact our growth
and profitability.
In March 2000, the California state constitution was amended,
resulting in the expansion of gaming activities permitted to be conducted by
Native American groups in California. This may lead to increased competition
and may have an adverse effect on the profitability of Santa Anita Park,
Golden Gate Fields, Bay Meadows and our future growth in California. It may
also affect the purses that those tracks are able to offer and therefore
adversely affect our ability to attract top horses.
Several Native American groups in Florida have recently expressed
interest in opening or expanding existing casinos in southern Florida, which
could compete with Gulfstream Park and reduce its profitability.
11
Moreover, other Native American groups may open or expand casinos in
other regions of the country where we currently operate, or plan to operate,
racetracks or other gaming operations. Any such competition from Native
American groups could adversely affect our growth and profitability.
Some jurisdictions view our operations primarily as a means of
raising taxes, and therefore we are particularly vulnerable to additional or
increased taxes and fees.
We believe that the prospect of raising significant additional
revenue through taxes and fees is one of the primary reasons that certain
jurisdictions permit legalized gaming. As a result, gaming companies are
typically subject to significant taxes and fees in addition to the normal
federal, state, provincial and local income taxes, and such taxes and fees may
be increased at any time. From time to time, legislators and officials have
proposed changes in tax laws, or in the administration of such laws, affecting
the gaming industry. For instance, U.S. legislators have proposed the
imposition of a U.S. federal tax on gross gaming revenues. It is not possible
to determine with certainty the likelihood of any such changes in tax laws or
their administration; however, if enacted, such changes could have a material
adverse effect on our business.
The 2002 Breeders' Cup Pick 6 controversy could cause a decline in
bettor confidence and result in changes to legislation, regulation, or
industry practices of the horse racing industry, which could materially reduce
the amount wagered on horse racing and increase our costs, and therefore
adversely affect our revenue and operating results.
On October 26, 2002, in connection with the Breeders' Cup World
Thoroughbred Championships held at Arlington Park in Chicago, Illinois, only
one person placed winning bets on the Pick 6, a bet to pick the winning horse
in six consecutive races. The bettor purchased all six winning tickets, valued
at more than $2.5 million, through an OTB telephone system. Payment of the
winnings was withheld when an examination of the winning bets revealed an
unusual betting pattern. Scientific Games Corporation ("Scientific Games"),
the parent company of Autotote Systems, Inc. ("Autotote Systems"), later
announced that it had fired an employee who had allegedly accessed the
totalisator system operated by Autotote Systems, altered the winning Pick 6
tickets, and erased the record of his access. The Federal Bureau of
Investigation conducted an investigation, and on November 12, 2002, three
individuals were charged in a complaint by the United States Attorney's office
of White Plains, New York, with conspiracy to commit wire fraud. The three
individuals pleaded guilty in federal court to conspiring to commit fraud and
money laundering. On December 4, 2002, a class-action lawsuit against Autotote
Systems and Scientific Games was filed in Los Angeles Superior Court seeking
unspecified monetary damages suffered by Jimmy Allard and other bettors. In
the suit, the plaintiffs allege that Autotote Systems and Scientific Games
were negligent and engaged in deceptive and unfair practices. In addition, the
pari-mutuel pool for the Breeders' Cup Pick 6 remained frozen for almost five
months in an interest-bearing escrow account, despite legal attempts by
certain entities to have the appropriate payout distributed to ticketholders
with five of six winners. The United States Attorney for the Southern District
of New York authorized the release of the funds on March 20, 2003, following
the sentencing of the three perpetrators.
The National Thoroughbred Racing Association, an industry
association, has formed a task force to examine the Pick 6 controversy and
make recommendations. This task force has retained Ernst & Young LLP to
perform an examination of the internal controls and system security of the
totalisator systems of the three companies that collectively provide
substantially all the totalisator service to the North American horse racing
industry. The mandate of the Ernst & Young LLP examination is to recommend
best practices to be implemented by the totalisator companies concerning the
internal controls and system security of their totalisator systems.
The impact of the Pick 6 controversy is uncertain. A perceived lack
of integrity or security could result in a decline in bettor confidence, and
would likely lead to a decline in the amount wagered on horse racing. Further
negative publicity concerning the Pick 6 controversy, further negative
information being discovered as a result of the FBI or any other
investigation, and any negative information concerning the internal controls
and security of the totalisator systems may materially reduce the amount
wagered on horse racing and the revenue and earnings of companies engaged in
the horse racing industry, including us. The Pick 6 controversy has also
caused the horse racing industry to focus on another area of bettor concern,
late odds changes, which sometimes occur as odds
12
updates in the totalisator system cause significant changes in the odds after
a race has commenced. The Pick 6 controversy and this industry focus on late
odds changes may lead to changes in legislation, regulation, or industry
practices, which could result in a material reduction in the amount wagered on
horse racing and in the revenue and earnings of companies engaged in the horse
racing industry, including us.
If we pay persons who place fraudulent "winning" wagers, we would
remain liable to pay the holders of the proper winning wagers the full amount
due to them.
As indicated by the Pick 6 controversy described in the preceding
risk factor, we may be subject to fraudulent claims for millions of dollars.
If we paid those claims, we would remain liable to the holders of the proper
winning wagers for the full amount due to them and would have the
responsibility to attempt to recover the money that we paid on the fraudulent
claims. We may not be able to recover that money, which would adversely affect
our operating results.
Our operating results fluctuate seasonally and may be impacted by a
reduction in live racing dates due to regulatory factors.
We experience significant fluctuations in quarterly operating results
due to the seasonality associated with the racing schedules at our racetracks.
Generally, our revenues from racetrack operations are greater in the first
quarter of the calendar year than in any other quarter. We have a limited
number of live racing dates at each of our racetracks and the number of live
racing dates varies somewhat from year to year. The allocation of live racing
dates in most of the jurisdictions in which we operate is subject to
regulatory approval from year to year and, in any given year, we may not
receive the same or more racing dates than we have had in prior years. We are
also faced with the prospect that competing racetracks may seek to have some
of our historical dates allocated to them. A significant decrease in the
number of our live racing dates would reduce our revenues and cause our
business to suffer.
Unfavorable weather conditions may result in a reduction in the
number of races we hold.
Since horse racing is conducted outdoors, unfavorable weather
conditions, including extremely high or low temperatures, excessive
precipitation, storms or hurricanes, may cause races to be cancelled or may
reduce attendance and wagering. Since a substantial portion of our operating
expenses is fixed, a reduction in the number of races held or the number of
horses racing due to unfavorable weather would reduce our revenues and cause
our business to suffer.
The current lease of the Bay Meadows property expires on December 31,
2003 and may not be renewed.
The Bay Meadows site lease has been extended at market rates and
expires on December 31, 2003, subject to a further one-year extension at the
landlord's option. We are exploring various alternative venues, including
vacant land that we purchased in Dixon, California for future development, to
conduct the racing dates currently held at Bay Meadows after the expiry of the
lease term (including any extensions). There can be no assurance that we will
be successful in obtaining the necessary regulatory approvals to run these
racing dates at another racetrack operated by us in northern California if the
lease is not extended. If we conduct the Bay Meadows racing dates at another
of our racetracks, we may suffer a reduction in our revenues, which could
materially adversely affect our operating results.
In the state of Maryland, our revenue sharing and operations
agreement with the owner of Rosecroft Raceway may not be assumed by the
intended purchaser of the assets of Rosecroft Raceway, and in any event, such
agreement terminates on March 31, 2004.
The Maryland Jockey Club, the trade name for the entities that own
and operate Pimlico and Laurel Park, is a party to a Cross-Breed Horseracing
Revenue Sharing and Operations Agreement (the "Maryland Revenue Sharing
Agreement") with Cloverleaf Enterprises, Inc. ("Cloverleaf"), the owner of
Rosecroft Raceway
13
("Rosecroft"), a standardbred track located in Prince George's County in
Maryland. The Maryland Revenue Sharing Agreement was effective as of January
1, 2000 and expires March 31, 2004.
The Maryland Revenue Sharing Agreement provides for wagering to be
conducted, both day and night, on live and simulcast thoroughbred and harness
races at Pimlico, Laurel Park and Rosecroft and the three Maryland
OTBs operated by them. Under the agreement, wagering revenue from these sources
is pooled and certain expenses and obligations are pooled and paid from those
revenues to generate net wagering revenue. This net wagering revenue is then
distributed 80% to The Maryland Jockey Club and 20% to Rosecroft. This
agreement was entered into to resolve all issues relating to Maryland law,
which prevents thoroughbred tracks in Maryland from offering live racing or
accepting simulcast wagering after 6:15 p.m. without Rosecroft's consent and
the federal Interstate Horseracing Act which provides that, without the
consent of The Maryland Jockey Club, Rosecroft cannot accept simulcast
wagering on horse racing during the times that Pimlico or Laurel are running
live races.
It has been announced that Centaur, Inc. has contracted with
Cloverleaf to acquire the assets of Rosecroft, subject to certain conditions
(including the approval of the Maryland Racing Commission). Centaur, Inc. may
or may not be assuming the obligations of the Maryland Revenue Sharing
Agreement as part of that sale, which failure to assume may result in
litigation. On April 29, 2003, Centaur reportedly reached an agreement with
Sportsystems Corp., a subsidiary of Delaware North Companies, pursuant to
which Sportsystems agreed to partner with Centaur to finance the purchase of
and provide services at Rosecroft. Upon approval of the sale of Rosecroft to
Centaur, Sportsystems will be granted an option to purchase 75% of Rosecroft.
There have also been recent reports that Centaur and Sportsystems may have
terminated their agreement. In the event of the non-assumption by Centaur or
Sportsystems or the expiry on March 31, 2004 of the Maryland Revenue Sharing
Agreement, the Company will be required to renegotiate an agreement with
either Centaur or Sportsystems. Such renegotiation, or the failure to reach a
new agreement, may result in a decline in the revenues of The Maryland Jockey
Club that materially adversely affects our operating results.
We provide management services to Colonial Downs and Maronas
pursuant to management contracts which are dependent on third party actions
and events over which we have limited control.
The revenues that we receive from our operations in Virginia through
the management of the Colonial Downs race meets and pari-mutuel wagering
system are highly dependent on the business strategy of Colonial Downs, over
which we have limited control. Moreover, our Virginia operations are highly
dependent on Colonial Downs' ability to maintain the owner's and operator's
licenses issued to it by the Virginia Racing Commission, over which we have
limited control. In addition, our management contract with Colonial Downs
provides for a one-half reduction in the management fee we receive if and to
the extent that non-pari-mutuel gaming activities become authorized and are
conducted by us in Maryland but are not authorized and conducted in Virginia.
The revenues that we receive by providing management services to
Maronas, a thoroughbred racetrack in Montevideo, Uruguay, are somewhat
dependent on the business strategy of Maronas, over which we have limited
control. These revenues are also highly dependent on Maronas' ability to
maintain licenses and permits pursuant to which it operates under the law of
Uruguay and over which we have limited control.
The profitability of our racetracks is partially dependent upon the
size of the local horse population in the areas in which our racetracks are
located.
Horse population is a factor in a racetrack's profitability because
it generally affects the average number of horses (i.e., the average "field
size") that run in races. Larger field sizes generally mean increased wagering
and higher wagering revenues due to a number of factors, including the
availability of exotic bets (such as "exacta" and "trifecta" wagers). Various
factors have led to declines in the horse population in certain areas of the
country, including competition from racetracks in other areas, increased costs
and changing economic returns for owners and breeders, and Mare Reproductive
Loss Syndrome, which caused a large number of mares in Kentucky to sustain
late term abortions or early embryonic loss in 2001. If we are unable to
attract horse owners to stable and race their horses at our tracks by offering
a competitive environment, including improved facilities, well-
14
maintained racetracks, better living conditions for backstretch personnel
involved in the care and training of horses stabled at our tracks, and a
competitive purse structure, our profitability could decrease.
We depend on agreements with our horsemen's industry associations to
operate our business.
The U.S. Interstate Horseracing Act of 1978, as well as various state
racing laws, require that, in order to simulcast races, we have written
agreements with the horsemen at our racetracks, who are represented by
industry associations. In some jurisdictions, if we fail to maintain operative
agreements with the industry associations, we may not be permitted to conduct
live racing or simulcasting at tracks within those jurisdictions. In addition,
our simulcasting agreements are generally subject to the approval of the
industry associations. Should we fail to renew existing agreements with the
industry associations on satisfactory terms or fail to obtain approval for new
simulcast agreements, we would lose revenues and our operating results would
suffer.
If we are unable to continue to negotiate satisfactory union
contracts, some of our employees may commence a strike. A strike by our
employees or a work stoppage by backstretch personnel, who are employed by
horse owners and trainers, may lead to lost revenues and could have a material
adverse effect on our business.
As of December 31, 2002, we employed approximately 5,100 full-time
employees, approximately 3,000 of whom were represented by unions. A strike or
other work stoppage by our employees could lead to lost revenues and have a
material adverse effect on our business, financial condition, operating
results and prospects.
Legislation enacted in California could facilitate the organization
of backstretch personnel in that state. A strike by backstretch personnel
could, even though they are not our employees, lead to lost revenues and
therefore hurt our operating results.
An earthquake in California could interrupt our operations at Santa
Anita Park, Golden Gate Fields and Bay Meadows, which would adversely impact
our cash flow from these racetracks.
Three of our largest racetracks, Santa Anita Park, Golden Gate Fields
and Bay Meadows, are located in California and are therefore subject to
earthquake risks. We do not maintain significant earthquake insurance on the
structures at our California racetracks. We maintain fire insurance for fire
risks, including those resulting from earthquakes, subject to policy limits
and deductibles. There can be no assurance that earthquakes or the fires often
caused by earthquakes will not seriously damage our California racetracks and
related properties or that the recoverable amount of insurance proceeds will
be sufficient to fully cover reconstruction costs and other losses. If an
uninsured or underinsured loss occurs, we could lose anticipated revenue and
cash flow from our California racetracks.
Our business depends on providers of totalisator services.
In purchasing and selling our pari-mutuel wagering products, our
customers depend on information provided by each of the three main totalisator
companies operating in North America. These totalisator companies provide the
computer systems that accumulate wagers, record sales, calculate payoffs and
display wagering data. The loss of any of the totalisator companies as a
provider of these critical services would decrease competition in the market
for those services and could result in an increase in the cost to obtain them.
Additionally, the failure of the totalisator companies to keep their
technology current could limit our ability to serve customers effectively,
develop new forms of wagering, or ensure a sufficient level of wagering
security. Because of the highly specialized nature of these services,
replicating these totalisator services would be expensive.
A decline in general economic conditions could adversely affect our
business.
Our operations are affected by general economic conditions, and
therefore our future success is unpredictable. The demand for entertainment
and leisure activities tends to be highly sensitive to consumers' disposable
incomes, and thus a decline in general economic conditions may lead to our
customers having less
15
discretionary income to wager on horse racing. In 2002 and the first quarter
of 2003, the weak U.S. economy had a negative impact on our operating results
and if the economy deteriorates further, the consequent reduction in our
revenues could have a material adverse effect on our operating results.
Real Estate Ownership and Development Risks
Our ownership and development of real estate is subject to risks and
may involve significant ongoing expenditures or losses that could adversely
affect our operating results.
All real estate investments are subject to risks including: general
economic conditions, such as the availability and cost of financing; local
real estate conditions, such as an oversupply of residential, office, retail
or warehousing space, or a reduction in demand for real estate in the area;
governmental regulation, including taxation of property and environmental
legislation; and the attractiveness of properties to potential purchasers or
tenants. The real estate industry is also capital intensive and sensitive to
interest rates. Further, significant expenditures, including property taxes,
mortgage payments, maintenance costs, insurance costs and related charges,
must be made throughout the period of ownership of real property, which
expenditures may negatively impact our operating results.
We may not be able to sell or otherwise monetize some of our non-core
real estate, excess racing real estate and revenue-producing non-racing real
estate when we need to or at the price we want, which may materially adversely
affect our financial condition.
At times, it may be difficult for us to dispose of or otherwise
monetize some of our non-core real estate, excess racing real estate and
revenue-producing non-racing real estate. The costs of holding real estate may
be high and, during a recession, we may be faced with ongoing expenditures
with little prospect of earning revenue on our non-core real estate and excess
racing real estate properties. If we have inadequate cash reserves or credit
facilities, we may have to dispose of properties at prices that are
substantially below the prices we desire, and in some cases, below the prices
we originally paid for the properties, which may materially adversely affect
our financial condition and our growth plans.
We require governmental approvals for some of our properties which
may take a long time to obtain or which may not be granted, either of which
could materially adversely affect our existing business or our growth.
Some of our properties will require zoning and other approvals from
local government agencies. The process of obtaining these approvals may take
many months and we might not obtain the necessary approvals. Furthermore, in
the case of certain land to be held by us in Aurora, Ontario, the transfer of
this land to us from Magna International is conditional on our obtaining
permission to sever the land from adjoining properties and other approvals. If
we do not obtain these approvals, we may not ultimately acquire this land.
Holding costs, while regulatory approvals are being sought, and delays may
render a project economically unfeasible. If we do not obtain all of our
necessary approvals, our plans, growth and profitability could be materially
adversely affected.
We may not be able to complete expansion projects successfully and on
time, which would materially adversely affect our growth and our operating
results.
We intend to further develop our racetracks and expand our gaming
activities. Numerous factors, including regulatory and financial constraints,
could cause us to alter, delay or abandon our existing plans. If we proceed to
develop new facilities or enhance our existing facilities, we face numerous
risks that could require substantial changes to our plans. These risks include
the inability to secure all required permits and the failure to resolve
potential land use issues, as well as risks typically associated with any
construction project, including possible shortages of materials or skilled
labor, unforeseen engineering or environmental problems, delays and work
stoppages, weather interference and unanticipated cost overruns. For example,
Santa Anita Park completed certain upgrades to its facilities in 1999. The
disruption caused by these upgrades was greater than anticipated and reduced
the total amount wagered at Santa Anita Park's simulcast wagering facilities
and attendance at The Oak
16
Tree Meet in 1999. Even if completed in a timely manner, our expansion
projects may not be successful, which would affect our growth and could have a
material adverse effect on our future profitability.
We have deferred a decision on the proposed redevelopment of
Gulfstream Park in Florida. If we proceed with such redevelopment, we will
schedule the project to minimize any interference with Gulfstream Park's
racing season, but there is a risk that the redevelopment will not be
completed according to schedule, in which case it could cause us to disrupt a
racing season and result in a reduction in the revenues and earnings generated
at Gulfstream Park during that season.
We are currently subject to an agreement with the Maryland Racing
Commission that requires us to expend at least $15 million on capital
improvements to the Laurel Park and Pimlico Race Course racetracks and the
thoroughbred training facility in Bowie, Maryland, together with their related
facilities and operations, between January 1, 2003 and June 30, 2004. We will
endeavor to schedule the work for these expenditures to minimize interference
with the respective racing seasons, but given the short timeline, that cannot
be assured. If there is interference with the racing seasons of either of
Pimlico Race Course or Laurel Park, or the project plans are not completed
according to schedule, it could result in a reduction in the revenues and
earnings generated at those racetracks.
We face strict environmental regulation and may be subject to
liability for environmental damage, which could materially adversely affect
our financial results.
We are subject to a wide range of requirements under environmental
laws and regulations relating to waste water discharge, waste management and
storage of hazardous substances. Compliance with environmental laws and
regulations can, in some circumstances, require significant capital
expenditures. Moreover, violations can result in significant penalties and, in
some cases, interruption or cessation of operations. We were involved in a
dispute with the United States Environmental Protection Agency involving the
Portland Meadows racetrack, which we currently lease and operate, which
dispute caused us to postpone the planned opening of the 2001-2002 meet at
that facility on September 1, 2001 and also to conclude the 2001-2002 meet
early, on February 10, 2002.
Furthermore, we may not have all required environmental permits and
we may not otherwise be in compliance with all applicable environmental
requirements. Where we do not have an environmental permit but one may be
required, we will determine if one is in fact required and, if so, will seek
to obtain one and address any related compliance issues, which may require
significant capital expenditures.
Various environmental laws and regulations in the United States,
Canada and Europe impose liability on us as a current or previous owner and
manager of real property, for the cost of maintenance, removal and remediation
of hazardous substances released or deposited on or in properties now or
previously owned or managed by us or disposed of in other locations. Our
ability to sell properties with hazardous substance contamination or to borrow
money using that property as collateral may also be uncertain.
Changes to environmental laws and regulations, resulting in more
stringent terms of compliance, or the enactment of new environmental
legislation, could expose us to additional liabilities and ongoing expenses.
Any of these environmental issues could have a material adverse
effect on our business.
Risks Relating to Our Securities
Our stock price may be volatile, and future issuances or sales of our
stock may decrease our stock price.
The trading price of our Class A Subordinate Voting Stock has
experienced, and may continue to experience, substantial volatility. The
following factors have had, and may continue to have, a significant effect on
the market price of our Class A Subordinate Voting Stock:
17
o our historical and anticipated operating results;
o the announcement of new wagering and gaming opportunities by us or
our competitors;
o the passage or anticipated passage of legislation affecting horse
racing or gaming;
o developments affecting the horse racing or gaming industries
generally;
o sales or other issuances or the perception of potential sales or
issuances, including in connection with our past and future
acquisitions, of substantial amounts of our shares;
o sales or the expectation of sales by Magna International of a portion
of our shares held by it, as a result of its previously stated
intention to reduce its majority equity position in us over time, or
by our other significant stockholders; and
o a shift in investor interest away from the gaming industry, in
general.
These factors could have a material adverse effect on the market
price of our Class A Subordinate Voting Stock and other securities, regardless
of our financial condition and operating results.
The trading price of our Class A Subordinate Voting Stock could
decrease as a result of our issuing additional shares as consideration for
future acquisitions.
We may issue our Class A Subordinate Voting Stock as full or partial
consideration in connection with future acquisitions. To the extent that we do
so, the percentage of our common equity and voting stock that our existing
stockholders own will decrease and, particularly if such acquisitions do not
contribute proportionately to our profitability, the trading price of our
shares may also decrease.
Sales of our Class A Subordinate Voting Stock by Magna International
or by certain other of our significant stockholders under our shelf
registration statement could depress our stock price.
As of the date of this prospectus, Magna International owns,
directly or indirectly, 4,362,328 shares of our Class A Subordinate Voting
Stock and 58,466,056 shares of our Class B Stock (which are convertible into
shares of our Class A Subordinate Voting Stock on a one-for-one basis). Magna
International has announced its intention at an undetermined time in the
future to convert some shares of our Class B Stock to shares of our Class A
Subordinate Voting Stock and dispose of these shares of our Class A
Subordinate Voting Stock when market conditions for doing so are favorable,
with the ultimate intention of retaining only a minority equity position but
continuing to retain control of us. In addition, we have an effective shelf
registration statement that permits the secondary sale of shares of our Class
A Subordinate Voting Stock by some of our stockholders who received those
shares in connection with our past acquisitions. A total of 857,401 shares
covered by that shelf registration statement remain unsold. We also have an
effective shelf registration statement covering up to 8,823,529 shares of our
Class A Subordinate Voting Stock issuable upon the conversion of $75.0 million
aggregate outstanding principal amount of our 7 1/4% Convertible Subordinated
Notes due December 15, 2009. Sales of a substantial number of shares of our
Class A Subordinate Voting Stock, either by Magna International or under our
shelf registration statements, could depress the prevailing market price of
our Class A Subordinate Voting Stock. See "Our Company".
We do not plan to pay dividends until 2004, if at all.
We have not paid any dividends to date on our Class A Subordinate
Voting Stock, we do not plan to pay any dividends until 2004 and we may not
pay dividends then, or ever. See `Corporate Constitution - Required
Allocations - Dividends".
18
Our debt securities are subject to risks associated with debt
financing.
Our debt securities are subject to the following risks associated
with debt financing:
o the risk that cash flow from operations will be insufficient to meet
required payments of principal and interest;
o the risk that, to the extent that we maintain floating rate
indebtedness, interest rates will fluctuate; and
o risks resulting from the fact that the indentures or other agreements
governing our debt securities and credit facilities may contain
covenants imposing certain limitations on our ability to acquire and
dispose of assets and otherwise conduct and finance our business.
In addition, although we anticipate that we will be able to repay or
refinance any indebtedness that we incur when it matures, we may not be able
to do so, and the terms of any refinancings of our indebtedness may not be
favorable to us. Our leverage may have important consequences including the
following:
o our ability to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes may be impaired, or
such financing may not be available on terms favorable to us;
o a substantial decrease in our operating cash flow or an increase in
our expenses could make it difficult for us to meet our debt service
requirements and force us to modify our operations; and
o our higher level of debt and resulting interest expense may place us
at a competitive disadvantage with respect to a competitor with lower
amounts of indebtedness and/or higher credit ratings.
FORWARD-LOOKING STATEMENTS
This prospectus, including documents incorporated by reference,
contains forward-looking statements as defined by the U.S. Securities Act of
1933, as amended (the "Securities Act") and the U.S. Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These forward-looking statements may
include, among others, statements regarding: expectations as to operational
improvements; expectations as to cost savings, revenue growth and earnings;
the time by which certain objectives will be achieved; estimates of costs
relating to environmental remediation and restoration; proposed new racetracks
and other developments, products and services; expectations that claims,
lawsuits, environmental costs, commitments, contingent liabilities, labor
negotiations or agreements, or other matters will not have a material adverse
effect on our consolidated financial position, operating results, prospects or
liquidity; projections, predictions, expectations, estimates or forecasts as
to our financial and operating results and future economic performance; and
other matters that are not historical facts.
Forward-looking statements should not be read as guarantees of
future performance or results, and will not necessarily be accurate
indications of whether or the times at or by which such performance or results
will be achieved. Forward-looking statements are based on information
available at the time and/or management's good faith belief with respect to
future events, and are subject to risks and uncertainties that could cause
actual performance or results to differ materially from those expressed in the
statements.
Important factors that could cause such differences include, but are
not limited to, the factors discussed above under "Risk Factors" and our
subsequent public filings.
Forward-looking statements speak only as of the date the statement
was made. We assume no obligation to update forward-looking information to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information. If we update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect thereto or with respect to other
forward-looking
19
statements.
DIVIDEND POLICY
The holders of our Class A Subordinate Voting Stock and our Class B
Stock are entitled to receive their proportionate share of dividends declared
by our board of directors, except in the case of some stock dividends. Subject
to applicable law, we intend to pay quarterly dividends starting in 2004. Any
dividends will be declared on our Class A Subordinate Voting Stock and Class B
Stock in accordance with our restated certificate of incorporation, including
our corporate constitution, which sets forth certain dividend entitlements for
our stockholders, subject to applicable law.
We have not declared any dividends since our Class A Subordinate
Voting Stock has been publicly trading.
See "Description of Capital Stock--Capital Stock" and "Corporate
Constitution--Required Allocations--Dividends".
EARNINGS RATIOS
Our consolidated ratio of earnings to fixed charges for each of the
periods indicated is as set forth in the table below.
Five
Months
Year Ended Three Months Ended
Ended December Year Ended December 31, March 31,
July 31, 31, -----------------------------------------------------------
1998 1998 1999 2000 2001 2002 2002 2003
------- ------- ------- ------- ------- ------- ------- -------
Ratio of earnings to fixed
charges.................... __(1) __(2) 2.18 1.45 3.90 __(3) 26.31 7.46
- -----------
(1) For this period, losses exceeded fixed charges by $5.2 million.
(2) For this period, losses exceeded fixed charges by $1.7 million.
(3) For this period, losses exceeded fixed charges by $8.9 million.
"Earnings" consist of income from continuing operations before income
taxes and fixed charges. "Fixed charges" consist of interest expense
(including interest cost capitalized) and other financing charges.
20
SELLING SECURITYHOLDERS
The notes were originally issued by us and sold by Bank Austria
Creditanstalt AG (the "Initial Purchaser") in transactions exempt from the
registration requirements of the Securities Act in offshore transactions under
Regulation S of the Securities Act or to persons reasonably believed by the
Initial Purchaser to be "qualified institutional buyers" as defined by Rule
144A under the Securities Act. The selling securityholders may from time to
time offer and sell pursuant to this prospectus any or all of the notes listed
below and the shares of Class A Subordinate Voting Stock issued upon purchase
by us, or conversion, of such notes. When we refer to the "selling
securityholders" in this prospectus, we mean those persons listed in the table
below, as well as the pledgees, donees, assignees, transferees, successors and
others who later hold any of the selling securityholders' interests.
The table below sets forth the name of each selling securityholder,
the principal amount at maturity of notes that each selling securityholder may
offer pursuant to this prospectus and the number of shares of Class A
Subordinate Voting Stock into which such notes are convertible. To our
knowledge, none of the selling securityholders has, or within the past three
years has had, any material relationship with us or any of our predecessors or
affiliates or beneficially owns in excess of 1% of our outstanding Class A
Subordinate Voting Stock.
The principal amounts of the notes provided in the table below is
based on information provided to us by each of the selling securityholders,
and the percentages are based on $150,000,000 aggregate principal amount of
notes outstanding. The number of shares of our Class A Subordinate Voting
Stock that may be sold is based on the current conversion rate of 141.844
shares of our Class A Subordinate Voting Stock for each $1,000 principal
amount of notes.
Since the date on which the selling securityholders provided this
information, each selling securityholder identified below may have sold,
transferred or otherwise disposed of all or a portion of their notes in one or
more transactions exempt from the registration requirements of the Securities
Act. Information concerning the selling securityholders may change from time
to time and any changed information will be set forth in supplements to this
prospectus to the extent required. In addition, the conversion ratio, and
therefore the number of shares of our Class A Subordinate Voting Stock
issuable upon conversion of the notes, is subject to adjustment. Accordingly,
the number of shares of Class A Subordinate Voting Stock issuable upon
conversion of the notes may increase or decrease.
The selling securityholders may from time to time offer and sell any
or all of the securities under this prospectus. Because the selling
securityholders are not obligated to sell the notes or shares of Class A
Subordinate Voting Stock issuable upon conversion of the notes, we cannot
estimate the amount of notes or how many shares of Class A Subordinate Voting
Stock that the selling securityholders will hold upon consummation of any such
sales.
Number of shares
of Class A
Aggregate Subordinate
Principal Amount Voting Stock That
of Notes That May May Be Sold Under Percentage of
Be Sold Under Percentage of this Prospectus Shares
Name this Prospectus Notes Outstanding (1) Outstanding (2)
- -------------------------------------- ------------------- ------------------- ------------------- -------------------
All holders of the notes or $150,000,000 100.000% 21,276,595 30.414%
future transferees, pledgees,
donees, assignees or successors of
any such holders (3)
Total $150,000,000 100.000% 21,276,595(4) 30.414%
21
* Less than one percent (1%)
(1) The number of shares of Class A Subordinate Stock beneficially owned
and being offered, as set forth in the table, has been determined in
accordance with Rule 13d-3 under the Exchange Act, include shares of
Class A Subordinate Voting Stock into which the notes are
convertible, and assumes a conversion price of $7.05 per share of
Class A Subordinate Voting Stock and the payment of cash in lieu of
fractional shares. In addition, the conversion price of the notes may
be adjusted under certain circumstances which will change the number
of shares of Class A Subordinate Voting Stock received upon their
conversion. See "Description of the Notes - Conversion of the Notes".
(2) Calculated based on Rule 13d-3(d)(i) of the Exchange Act, using
48,679,796 shares of Class A Subordinate Voting Stock outstanding as
of June 30, 2003. In calculating this percentage for each holder, we
treated as outstanding the number of shares of Class A Subordinate
Voting Stock issuable upon the conversion of all that holder's notes,
but we did not assume conversion of any other holders' notes, or
include any other shares of Class A Subordinate Voting Stock that may
be held by such holder. Does not include shares of Class A
Subordinate Voting Stock that may be issued by us upon redemption or
purchase of the notes by us at the option of the holder.
(3) Information concerning selling securityholders, including current
holders of the notes for which we have not received information
regarding their holdings, will be included in supplements to this
prospectus, if required. For purposes of this table, we have assumed
that any holders of the notes, or any future pledgees, donees,
assignees, transferees or successors of or from any such holders of the
notes, do not beneficially own any other shares of Class A Subordinate
Voting Stock, other than the shares of Class A Subordinate Voting Stock
issuable upon the conversion of the notes.
(4) Represents the number of shares of Class A Subordinate Stock into
which the $150,000,000 of notes would be convertible at the initial
conversion price described in footnote 1 above.
DESCRIPTION OF THE NOTES
We issued the notes under an indenture dated as of June 2, 2003
between us and The Bank of New York, as trustee. The following summarizes
some, but not all, provisions of the notes and the indenture. We urge you to
read the indenture because the indenture, and not this description, defines
your rights as a holder of the notes. A copy of the indenture, including the
form of certificate evidencing the notes, is included as an exhibit to the
registration statement of which this prospectus is a part.
In this section of the prospectus entitled "Description of the
Notes," when we refer to "MEC," "we," "our," or "us," we are referring to
Magna Entertainment Corp. and not to any of its subsidiaries.
General
The notes are direct, general unsecured obligations of MEC and are
subordinate in right of payment as described under "Subordination of Notes"
below. The notes rank pari passu in right of payment with our 7 1/4%
Convertible Subordinated Notes due December 15, 2009. The notes are
convertible into our Class A Subordinate Voting Stock as described under
"Conversion of Notes" below. The aggregate principal amount of the notes is
$150.0 million. The notes were issued in denominations of $1,000 or in
multiples of $1,000. The notes will mature on June 15, 2010, unless earlier
redeemed at our option, converted at your option, or purchased by us at your
option upon a change in control.
Neither we nor our subsidiaries are restricted from paying dividends,
incurring debt, or issuing or repurchasing our securities under the indenture.
In addition, there are no financial covenants in the indenture. You are not
protected under the indenture in the event of a highly leveraged transaction
or a change in control of MEC, except to the extent described under "Purchase
of Notes at Your Option Upon a Change in Control" below.
22
The notes bear interest at the annual rate of 8.55%. Interest is
payable on June 15 and December 15 of each year, beginning December 15, 2003,
subject to limited exceptions if the notes are converted, redeemed or
purchased prior to the interest payment date. The record dates for the payment
of interest will be June 1 and December 1. We may, at our option, pay interest
on the notes by check mailed to the holders. However, a holder with an
aggregate principal amount in excess of $1.0 million will be paid by wire
transfer in immediately available funds upon its election if the holder has
provided us with wire transfer instructions at least 10 business days prior to
the payment date. Interest on the notes will be paid on the basis of a 360-day
year comprised of twelve 30-day months. We are not required to make any
payment on the notes due on any day that is not a business day until the next
succeeding business day. The payment made on the next succeeding business day
will be treated as though it were paid on the original due date and no
interest will accrue on the payment for the additional period of time.
We will maintain an office in New York City and London where the
notes may be presented for registration, transfer, exchange or conversion.
This office will initially be an office or agency of the trustee. Except under
limited circumstances described below, the notes will be, and the initial
notes were, issued only in fully registered book entry form, without coupons,
and are represented by one or more global notes. There will be no service
charge for any registration of transfer or exchange of notes. We may, however,
require holders to pay a sum sufficient to cover any tax or other governmental
charge payable in connection with certain transfers or exchanges.
Conversion of Notes
You have the right, at your option, to convert your notes into shares
of our Class A Subordinate Voting Stock at any time until the close of
business on the last business day prior to maturity, unless previously
redeemed or purchased, at the conversion price of $7.05 per share, subject to
the adjustments described below. This is equivalent to a conversion rate of
approximately 141.844 shares of Class A Subordinate Voting Stock for each
$1,000 principal amount of notes.
Except as described below, we will not make any payment or other
adjustment for accrued interest or dividends on any Class A Subordinate Voting
Stock issued upon conversion of the notes. If you submit your notes for
conversion between a record date and the opening of business on the next
interest payment date (except for notes or portions of notes called for
redemption or subject to purchase following a change in control on a
redemption date or a purchase date, as the case may be, occurring during the
period from the close of business on a record date and ending on the opening
of business on the first business day after the next interest payment date, or
if this interest payment date is not a business day, the second business day
after the interest payment date), you must pay funds equal to the interest
payable on the principal amount being converted. As a result of the foregoing
provisions, if the exception described in the preceding sentence does not
apply and you surrender your notes for conversion on a date that is not an
interest payment date, you will not receive any interest for the period from
the interest payment date next preceding the date of conversion or for any
later period.
We will not issue fractional shares of Class A Subordinate Voting
Stock upon conversion of notes. Instead, we will pay cash for the fractional
amount based upon the closing market price of the Class A Subordinate Voting
Stock on the last trading day prior to the date of conversion.
If the notes are called for redemption or are subject to purchase
following a change in control, your conversion rights on the notes called for
redemption or so subject to purchase will expire at the close of business on
the last business day before the redemption date or purchase date, as the case
may be, or such earlier date as the notes are presented for redemption or for
purchase, unless we default in the payment of the redemption price or purchase
price, in which case, your conversion right will terminate at the close of
business on the date the default is cured and the notes are redeemed or
purchased. If you have submitted your notes for purchase upon a change in
control, you may convert your notes only if you withdraw your election in
accordance with the indenture.
The conversion price will be adjusted upon the occurrence of:
(1) the issuance of shares of our Class A Subordinate Voting Stock as
a dividend or distribution on our Class A Subordinate Voting Stock;
23
(2) the subdivision or combination of our outstanding Class A
Subordinate Voting Stock;
(3) the issuance to all or substantially all holders of our Class A
Subordinate Voting Stock of rights or warrants entitling them for a period of
not more than 60 days to subscribe for or purchase our Class A Subordinate
Voting Stock, or securities convertible into our Class A Subordinate Voting
Stock, at a price per share or a conversion price per share less than the then
current market price per share; provided that the conversion price will be
readjusted to the extent that such rights or warrants are not exercised prior
to the expiration;
(4) the distribution to all or substantially all holders of our Class
A Subordinate Voting Stock of shares of our capital stock, evidences of
indebtedness or other non-cash assets, or rights or warrants, excluding:
o dividends, distributions and rights or warrants referred to in clause
(1) or (3) above; and
o distribution of rights to all holders of Class A Subordinate Voting
Stock pursuant to an adoption of a shareholder rights plan;
(5) the dividend or distribution to all or substantially all holders
of our Class A Subordinate Voting Stock of all-cash distributions in an
aggregate amount that together with (A) any cash and the fair market value of
any other consideration payable in respect of any tender offer by us or any of
our subsidiaries for our Class A Subordinate Voting Stock consummated within
the preceding 12 months not triggering a conversion price adjustment and (B)
all other all-cash distributions to all or substantially all holders of our
Class A Subordinate Voting Stock made within the preceding 12 months not
triggering a conversion price adjustment, exceeds an amount equal to 10% of
our market capitalization on the business day immediately preceding the day on
which we declare such distribution; and
(6) the purchase of our Class A Subordinate Voting Stock pursuant to
a tender offer made by us or any of our subsidiaries to the extent that the
same involves aggregate consideration that together with (A) any cash and the
fair market value of any other consideration payable in respect of any tender
offer by us or any of our subsidiaries for our Class A Subordinate Voting
Stock consummated within the preceding 12 months not triggering a conversion
price adjustment and (B) all-cash distributions to all or substantially all
holders of our Class A Subordinate Voting Stock made within the preceding 12
months not triggering a conversion price adjustment, exceeds an amount equal
to 10% of our market capitalization on the expiration date of such tender
offer.
If we implement a shareholders rights plan, we are required under the
indenture to provide that the holders of notes will receive the rights upon
conversion of the notes, whether or not these rights were separated from the
Class A Subordinate Voting Stock prior to conversion, subject to certain
limited exceptions.
In the event of:
o any reclassification of our Class A Subordinate Voting Stock;
o a consolidation, merger or combination involving MEC; or
o a sale or conveyance to another person of the property and assets of
MEC as an entirety or substantially as an entirety;
in which holders of our outstanding Class A Subordinate Voting Stock would be
entitled to receive stock, other securities, other property, assets or cash
for their Class A Subordinate Voting Stock, holders of notes will generally be
entitled to convert their notes into the same type of consideration received
by Class A Subordinate Voting Stock holders immediately prior to one of these
types of events.
24
You may, in some circumstances, be deemed to have received a
distribution or dividend subject to United States federal income tax as a
result of an adjustment or the nonoccurrence of an adjustment to the
conversion price. See "Certain United States Federal Income Tax Considerations
- -- U.S. Holders--Constructive Dividends Upon Adjustment of Conversion Price".
We are permitted to reduce the conversion price of the notes by any
amount for a period of at least 20 days if our board of directors determines
that such reduction would be in our best interest. We are required to give at
least 15 days prior notice of any reduction in the conversion price. We may
also reduce the conversion price to avoid or diminish income tax to holders of
our Class A Subordinate Voting Stock in connection with a dividend or
distribution of stock or similar event.
No adjustment in the conversion price is required unless it would
result in a change in the conversion price of at least one percent. Any
adjustment not made will be taken into account in subsequent adjustments.
Except as stated above, we will not adjust the conversion price for the
issuance of our Class A Subordinate Voting Stock or any securities convertible
into or exchangeable for our Class A Subordinate Voting Stock or the right to
purchase our Class A Subordinate Voting Stock or such convertible or
exchangeable securities.
Subordination of Notes
The notes are subordinate in right of payment to all our existing and
future Senior Debt. The indenture does not restrict the amount of Senior Debt
or other Indebtedness that we or any of our subsidiaries may incur. As of
March 31, 2003, assuming the original issuance of the notes had been
completed, the notes would have been subordinated to approximately $62.0
million in aggregate principal amount of our Senior Debt. As of March 31,
2003, our subsidiaries had $250.1 million in aggregate outstanding
obligations. The notes rank pari passu in right of payment with our $75.0
million aggregate principal amount of 7 1/4% Convertible Subordinated Notes
due December 15, 2009. After giving effect to the original issuance of the
notes, we would have had approximately $287.0 million in aggregate principal
amount of Indebtedness as of March 31, 2003.
The indenture provides that in the event of any insolvency or
bankruptcy proceedings, or any receivership, liquidation, reorganization or
other similar proceedings relative to MEC or to its property or assets, or in
the event of any proceedings for voluntary liquidation, dissolution or other
winding-up of MEC, whether or not involving insolvency or bankruptcy, or any
marshalling of the assets and liabilities of MEC, then holders of Senior Debt
will receive payment in full before the holders of the notes receive any
payment or distribution of any kind or character, whether in cash, property or
securities, which may be payable or deliverable in any such event in respect
of the notes. The indenture also provides that MEC shall not make any payment,
and the holders of the notes shall not be entitled to receive any payment or
benefit (including without limitation by compensation, set-off, combination of
accounts or realization of security or otherwise in any manner whatsoever), on
account of indebtedness represented by the notes at any time when a default or
an event of default, as defined in the agreement or instrument pursuant to
which such indebtedness is incurred (or any condition, event or act which with
notice, lapse of time or both would constitute an event of default) has
occurred under any Senior Debt that is continuing and the notice of such
default or event of default has been given to MEC by or on behalf of the
holders of any Senior Debt, unless such Senior Debt has been repaid in full or
unless and until such default or event of default has been cured or waived or
has ceased to exist.
Upon any distribution of our assets in connection with any
dissolution, winding-up, liquidation or reorganization of us or acceleration
of the principal amount due on the notes because of any event of default, all
Senior Debt must be paid in full in cash before the holders of the notes are
entitled to any payments whatsoever.
As a result of these subordination provisions, in the event of our
insolvency, holders of the notes may recover ratably less than the holders of
our Senior Debt and our general creditors. Such subordination will not prevent
the occurrence of any Event of Default under the indenture.
If the trustee or any holder of notes receives any payment or
distribution of our assets of any kind in contravention of any of the terms of
the indenture, whether in cash, property or securities, including, without
25
limitation, by way of set-off or otherwise, in respect of the notes before all
Senior Debt is paid in full in cash, then the payment or distribution will be
held by the recipient in trust for the benefit of holders of Senior Debt, and
will be immediately paid over or delivered to the holders of Senior Debt or
their representative or representatives to the extent necessary to make
payment in full of all Senior Debt remaining unpaid, after giving effect to
any concurrent payment or distribution, or provision therefor, to or for the
holders of Senior Debt.
The notes are our exclusive obligations. Since a significant amount
of our operations are conducted through our subsidiaries, our cash flow and
our consequent ability to service debt, including the notes, will depend in
part upon the earnings of our subsidiaries and the distribution of those
earnings to, or under loans or other payments of funds by those subsidiaries
to, us. The payment of dividends and the making of loans and advances to us by
our subsidiaries may be subject to statutory or contractual restrictions, will
depend upon the earnings of those subsidiaries and are subject to various
business considerations.
Our right to receive assets of any of our subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
notes to participate in those assets) will be effectively subordinated to the
claims of that subsidiary's creditors (including trade creditors), except to
the extent that we are recognized as a creditor of that subsidiary, in which
case our claims would still be in effect subordinate to any obligations
secured by the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by us.
The indenture does not limit the amount of additional indebtedness,
including Senior Debt, that we can create, incur, assume or guarantee, nor
will the indenture limit the amount of indebtedness and other liabilities that
any subsidiary may create, incur, assume or guarantee.
Definitions:
"Credit Agreement" means the Amended and Restated Credit Agreement
dated as of June 2, 2003, among MEC, the Guarantors named therein, Bank of
Montreal, acting through its Chicago lending office and BMO Nesbitt Burns, a
division of Bank of Montreal, as arranger, as such facility may be further
amended, extended, renewed, restated, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms, conditions,
covenants and other provisions) from time to time, and any agreement (and
related document) governing Indebtedness incurred to refinance, in whole or in
part, the borrowings and commitments then outstanding or permitted to be
outstanding under such facility or a successor facility, whether by the same
or any other lender of group of lenders.
"Exchange Rate Contract" means, with respect to any person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance
and other agreements or arrangements, or combination thereof, the principal
purpose of which is to provide protection against fluctuations in currency
exchange rates. An Exchange Rate Contract may also include an Interest Rate
Agreement.
"Indebtedness" means, with respect to any person, any indebtedness of
such person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, the notes or similar instruments or letters of
credit, bank guarantees or bankers' acceptances, or reimbursement agreements
in respect thereof, or representing the balance deferred and unpaid of the
purchase price of any property, including pursuant to capital leases and
sale-and-leaseback transactions, or representing our obligations and
liabilities, contingent or otherwise, in respect of leases required, in
conformity with GAAP, to be accounted for as capitalized lease obligations on
our balance sheet, or representing any hedging obligations under an Exchange
Rate Contract or an Interest Rate Agreement, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of
the foregoing indebtedness, other than obligations under an Exchange Rate
Contract or an Interest Rate Agreement, would appear as a liability upon a
balance sheet of such person prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the guarantee of items that
would be included within this definition. The amount of any Indebtedness
outstanding as of any date shall be the accreted value thereof, in the case of
any Indebtedness issued with original issue discount. Indebtedness shall not
include liabilities for taxes of any kind.
26
"Interest Rate Agreement" means, with respect to any person, any
interest rate swap agreement, interest rate cap agreement, interest rate
collar agreement or other similar agreement the principal purpose of which is
to protect the party indicated therein against fluctuations in interest rates.
"Senior Debt" with respect to us means Indebtedness (including any
monetary obligation in respect of the Credit Agreement, and interest, whether
or not allowable, accruing on Indebtedness incurred pursuant to the Credit
Agreement after the filing of a petition initiating any proceeding under any
bankruptcy, insolvency or similar law) of ours arising under the Credit
Agreement or any other Indebtedness of ours, whether outstanding on the date
of the indenture or thereafter created, incurred, assumed or guaranteed by us.
Notwithstanding anything to the contrary in the foregoing, Senior
Debt shall not include: (a) Indebtedness of or amounts owed by us for
compensation to employees, or for goods or materials purchased or for services
obtained in the ordinary course of business or (b) our Indebtedness that
expressly provides that it shall not be senior in right of payment to the
notes or expressly provides that it is on the same basis as or junior to the
notes.
Optional Redemption
The notes may not be redeemed at our option prior to June 2,
2006. Thereafter the notes may be redeemed at our option in whole, or in part,
upon not less than 20 nor more than 60 days' notice by mail to holders of the
notes at 100% of the principal amount of the notes together with accrued
interest up to, but not including, the redemption date; provided that (1) in
connection with any redemption of the notes occurring on or after June 2, 2006
and until June 2, 2008, the closing price of our Class A Subordinate Voting
Stock has exceeded 125% of the conversion price for at least 20 trading days
in the 30 consecutive trading day period ending on the trading day prior to
the mailing of the notice of redemption and (2) if the redemption date falls
after an interest payment record date and on or before an interest payment
date, then the interest payment shall be payable to holders of record on the
relevant record date.
If fewer than all the notes are to be redeemed, the trustee will
select the notes to be redeemed by lot, or in its discretion, on a pro rata
basis. If any note is to be redeemed in part only, a new note in principal
amount equal to the unredeemed principal portion will be issued. If a portion
of your notes is selected for partial redemption and you convert a portion of
your notes, the converted portion will be deemed to be the portion selected
for redemption.
No sinking fund is provided for the notes.
Purchase of Notes at Your Option upon a Change in Control
If a change in control occurs, you will have the right to require us
to purchase all or any part of your notes 30 business days after the
occurrence of such change in control at a purchase price equal to 100% of the
principal amount of the notes together with accrued and unpaid interest to,
but excluding, the purchase date. Notes submitted for purchase must be in
integral multiples of $1,000 principal amount. We will mail to the trustee and
to each holder a written notice of the change in control within 10 business
days after the occurrence of such change in control. This notice shall state
certain specified information, including:
o information about and the terms and conditions of the change in
control;
o information about the holders' right to convert the notes;
o the holders' right to require us to purchase the notes;
o the procedures required for exercise of the purchase option upon the
change in control; and
o the name and address of the paying and conversion agents.
27
You must deliver written notice of your exercise of this purchase
right to the paying agent at any time prior to the close of business on the
business day prior to the change in control purchase date. The written notice
must specify the notes for which the purchase right is being exercised. If you
wish to withdraw this election, you must provide a written notice of
withdrawal to the paying agent at any time prior to the close of business on
the business day prior to the change in control purchase date. A change in
control will be deemed to have occurred if any of the following occurs:
o any "person" or "group" is or becomes the "beneficial owner," directly or
indirectly, of shares of our voting stock representing 50% or more of the
total voting power of all outstanding classes of our voting stock or has
the power, directly or indirectly, to elect a majority of the members of
our board of directors;
o we consolidate with, or merge with or into, another person or we sell,
assign, convey, transfer, lease or otherwise dispose of all or
substantially all our assets, or any person consolidates with, or merges
with or into, us, in any such event other than pursuant to a transaction
in which the persons that "beneficially owned," directly or indirectly,
the shares of our voting stock immediately prior to such transaction
"beneficially own," directly or indirectly, shares of our voting stock
representing at least a majority of the total voting power of all
outstanding classes of voting stock of the surviving or transferee
person; or
o the holders of our capital stock approve any plan or proposal for our
liquidation or dissolution (whether or not otherwise in compliance with
the indenture).
However, a change in control will be deemed not to have occurred if:
o any of the Stronach Trust, Frank Stronach or any member of his immediate
family or any of their heirs or personal representatives, continue to be
the "beneficial owner", directly or indirectly, of shares of our voting
stock representing 50% or more of the total voting power of all
outstanding classes of our voting stock or has the power, directly or
indirectly, to elect a majority of the members of our board of directors;
or
o the last sale price of our Class A Subordinate Voting Stock for any five
trading days during the ten trading days immediately preceding the change
in control is at least equal to 105% of the conversion price in effect on
such day; or
o in the case of a merger or consolidation, all the consideration
(excluding cash payments for fractional shares and cash payments pursuant
to dissenters' appraisal rights) in the merger or consolidation
constituting the change in control consists of Class A Subordinate Voting
Stock traded on a United States national securities exchange or quoted on
the Nasdaq National Market (or which will be so traded or quoted when
issued or exchanged in connection with such change in control) and as a
result of such transaction or transactions the notes become convertible
solely into such Class A Subordinate Voting Stock.
For purposes of this change in control definition:
o "person" and "group" have the meanings given to them for purposes of
Sections 13(d) and 14(d) of the Exchange Act or any successor provisions,
and the term "group" includes any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, or any successor provision;
o a "beneficial owner" will be determined in accordance with Rule 13d-3
under the Exchange Act, as in effect on the date of the indenture, except
that the number of shares of our voting stock will be deemed to include,
in addition to all outstanding shares of our voting stock and unissued
shares deemed to be held by the "person" or "group" or other person with
respect to which the change in control determination is being made, all
unissued shares deemed to be held by all other persons;
o "beneficially own" and "beneficially owned" have meanings correlative to
that of beneficial owner;
28
o "unissued shares" means shares of voting stock not outstanding that are
subject to options, warrants, rights to purchase or conversion privileges
exercisable within 60 days of the date of determination of a change in
control, including the shares of Class A Subordinate Voting Stock
issuable upon conversion of the notes; and
o "voting stock" means any class or classes of capital stock or other
interests then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of the board of
directors, managers or trustees.
The term "all or substantially all" as used in the definition of
change in control will likely be interpreted under applicable state law and
will be dependent upon particular facts and circumstances. There may be a
degree of uncertainty in interpreting this phrase. As a result, we cannot
assure you how a court would interpret this phrase under applicable law if you
elect to exercise your rights following the occurrence of a transaction that
you believe constitutes a transfer of "all or substantially all" our assets.
We will under the indenture:
o comply with the provisions of Rule 13e-4 and Rule 14e-1, if applicable,
under the Exchange Act;
o file a Schedule TO or any successor or similar schedule, if required,
under the Exchange Act; and
o otherwise comply with all federal and state securities laws in connection
with any offer by us to purchase the notes upon a change in control.
This change in control purchase feature may make more difficult or
discourage a takeover of us and the removal of incumbent management. We are
not, however, aware of any specific effort to accumulate shares of our Class A
Subordinate Voting Stock or to obtain control of us by means of a merger,
tender offer, solicitation or otherwise. In addition, the change in control
purchase feature is not part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the change in control purchase feature is a
result of negotiations between us and the initial purchaser of the notes.
We could, in the future, enter into certain transactions, including
recapitalizations, that would not constitute a change in control but would
increase the amount of debt, including Senior Debt, outstanding or otherwise
adversely affect a holder. Neither we nor our subsidiaries are prohibited from
incurring debt, including Senior Debt, under the indenture. The incurrence of
significant amounts of additional debt could adversely affect our ability to
service our debt, including the notes.
Certain of our debt agreements that we may enter into in the future
may prohibit our redemption or repurchase of the notes and provide that a
change in control constitutes an event of default.
We may not purchase any note at any time when the subordination
provisions of the indenture otherwise would prohibit us from making such
repurchase. If we fail to repurchase the notes when required, this failure
will constitute an event of default under the indenture whether or not
repurchase is permitted by the subordination provisions of the indenture.
If a change in control were to occur, we may not have sufficient
funds to pay the change in control purchase price for the notes tendered by
holders. In addition, we may in the future incur debt that has similar change
of control provisions that permit holders of this future debt to accelerate or
require us to repurchase this future debt upon the occurrence of events
similar to a change in control. Our failure to repurchase the notes upon a
change in control will result in an event of default under the indenture,
whether or not the purchase is permitted by the subordination provisions of
the indenture.
29
Events of Default
Each of the following constitutes an event of default under the
indenture:
(1) we fail to pay principal on any note when due, whether or not
prohibited by the subordination provisions of the indenture;
(2) we fail to pay any interest, including any additional interest,
on any note when due if such failure continues for 30 days, whether or not
prohibited by the subordination provisions of the indenture;
(3) we fail to perform any other agreement required of us in the
indenture if such failure continues for 60 days after notice is given in
accordance with the indenture;
(4) we fail to pay the purchase price of any note when due, whether
or not prohibited by the subordination provisions of the indenture;
(5) we fail to provide timely notice of a change in control if such
failure continues for 30 days after notice is given;
(6) any indebtedness for money borrowed by us or one of our
significant subsidiaries (all or substantially all of the outstanding voting
securities of which are owned, directly, or indirectly, by us) in an aggregate
outstanding principal amount in excess of $10.0 million is not paid at final
maturity or upon acceleration and such indebtedness is not discharged, or such
acceleration is not cured or rescinded, within 30 days after written notice as
provided in the indenture; and
(7) certain events of bankruptcy, insolvency or reorganization of us
or any of our significant subsidiaries.
If an event of default, other than an event of default described in
clause (7) above with respect to us, occurs and is continuing, either the
trustee or the holders of at least 25% in aggregate principal amount of the
outstanding notes may declare the principal amount of the notes to be due and
payable immediately. If an event of default described in clause (7) above
occurs with respect to us, the principal amount of the notes will
automatically become immediately due and payable. Any payment by us on the
notes following any acceleration will be subject to the subordination
provisions described above.
After any such acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of the
notes may, under certain circumstances, rescind and annul such acceleration if
all events of default, other than the non-payment of accelerated principal,
have been cured or waived.
Subject to the trustee's duties in the case of an event of default,
the trustee will not be obligated to exercise any of its rights or powers at
the request of the holders, unless the holders have offered to the trustee
reasonable indemnity. Subject to the indenture, applicable law and the
trustee's indemnification, the holders of a majority in aggregate principal
amount of the outstanding notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
or exercising any trust or power conferred on the trustee with respect to the
notes.
No holder will have any right to institute any proceeding under the
indenture, or for the appointment of a receiver or a trustee, or for any other
remedy under the indenture unless:
o the holder has previously given the trustee written notice of a
continuing event of default;
30
o the holders of at least 25% in aggregate principal amount of the notes
then outstanding have made a written request and have offered reasonable
indemnity to the trustee to institute such proceeding as trustee; and
o the trustee has failed to institute such proceeding within 60 days after
such notice, request and offer, and has not received from the holders of
a majority in aggregate principal amount of the notes then outstanding a
direction inconsistent with such request within 60 days after such
notice, request and offer.
However, the above limitations do not apply to a suit instituted by a
holder for the enforcement of payment of the principal of or interest on any
note on or after the applicable due date or the right to convert the note in
accordance with the indenture.
Generally, the holders of not less than a majority of the aggregate
principal amount of outstanding notes may waive any default or event of
default unless:
o we fail to pay principal or interest on any note when due;
o we fail to convert any note into Class A Subordinate Voting Stock in
accordance with the provisions of the note and the indenture; or
o we fail to comply with any of the provisions of the indenture that would
require the consent of the holder of each outstanding note affected to
waive such failure.
We are required to furnish to the trustee, on an annual basis, a
statement by our officers as to whether or not MEC, to the officer's
knowledge, is in default in the performance or observance of any of the terms,
provisions and conditions of the indenture, specifying any known defaults.
Modification and Waiver
We and the trustee may amend or supplement the indenture or the notes
with the consent of the holders of a majority in aggregate principal amount of
the outstanding notes. In addition, the holders of a majority in aggregate
principal amount of the outstanding notes may waive our compliance in any
instance with any provision of the indenture without notice to the note
holders. However, no amendment, supplement or waiver may be made without the
consent of the holder of each outstanding note if such amendment, supplement
or waiver would:
o change the stated maturity of the principal of, or interest on, any note;
o reduce the principal amount of or any interest on any note;
o reduce the amount of principal payable upon acceleration of the maturity
of any note;
o change the place or currency of payment of principal of, or any interest
on, any note;
o impair the right to institute suit for the enforcement of any payment on,
or with respect to, any note;
o modify the provisions with respect to the purchase right of the holders
upon a change in control in a manner adverse to holders;
o modify the subordination provisions in a manner materially adverse to the
holders of notes;
o adversely affect the right of holders to convert notes other than as
provided in the indenture;
o reduce the percentage in principal amount of outstanding notes required
for modification or amendment of the indenture;
31
o reduce the percentage in principal amount of outstanding notes necessary
for waiver of compliance with certain provisions of the indenture or for
waiver of certain defaults; or
o modify provisions with respect to modification and waiver (including
waiver of events of default), except to increase the percentage required
for modification or waiver or to provide for consent of each affected
note holder.
We and the trustee may amend or supplement the indenture or the notes
without notice to, or the consent of, the note holders to, among other things,
cure any ambiguity, defect or inconsistency or make any other change that does
not, in the good faith opinion of our board of directors and the trustee,
adversely affect the rights of any note holder in any material respect.
Consolidation, Merger and Sale of Assets
We may not consolidate with or merge into any person in a transaction
in which we are not the surviving person or convey, transfer or lease our
properties and assets substantially as an entirety to any successor person,
unless:
o the successor person, if any, is a corporation organized and existing
under the laws of the United States, Canada, any state of the United
States, any province of Canada or the District of Columbia and assumes
our obligations on the notes and under the indenture;
o immediately after giving effect to the transaction, no default or event
of default shall have occurred and be continuing; and
o other conditions specified in the indenture are met.
Satisfaction and Discharge
We may discharge our obligations under the indenture while notes
remain outstanding if (1) all outstanding notes have or will become due and
payable at their scheduled maturity within one year or (2) all outstanding
notes are scheduled for redemption within one year, and, in either case, we
have deposited with the trustee or a paying agent an amount sufficient to pay
and discharge all outstanding notes on the date of their scheduled maturity or
the scheduled date of redemption; provided, however, that the foregoing shall
not discharge our obligation to effect conversion, registration of transfer or
exchange of securities in accordance with the terms of the indenture.
Transfer and Exchange
We have initially appointed the trustee as the security registrar,
paying agent and conversion agent, acting through its corporate trust office.
We reserve the right to:
o vary or terminate the appointment of the security registrar, paying agent
or conversion agent;
o act as paying agent;
o appoint additional paying agents or conversion agents; or
o approve any change in the office through which any security registrar,
paying agent or conversion agent acts.
32
Purchase and Cancellation
All notes surrendered for payment, redemption, registration of
transfer or exchange or conversion shall, if surrendered to any person other
than the trustee, be delivered to the trustee. All notes delivered to the
trustee shall be cancelled promptly by the trustee. No notes shall be
authenticated in exchange for any notes cancelled as provided in the
indenture.
We may, to the extent permitted by law, purchase notes in the open
market or by tender offer at any price or by private agreement. Any notes
purchased by us may, to the extent permitted by law, be reissued or resold or
may, at our option, be surrendered to the trustee for cancellation. Any notes
surrendered for cancellation may not be reissued or resold and will be
promptly cancelled. Any notes held by us or one of our subsidiaries shall be
disregarded for voting purposes in connection with any notice, waiver, consent
or direction requiring the vote or concurrence of note holders.
Replacement of Notes
We will replace mutilated, destroyed, stolen or lost notes at your
expense upon delivery to the trustee of the mutilated notes, or evidence of
the loss, theft or destruction of the notes satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity
satisfactory to the trustee and us may be required at the expense of the
holder of such note before a replacement note will be issued.
Governing Law
The indenture and the notes are governed by, and construed in
accordance with, the laws of the State of New York.
Concerning the Trustee
The Bank of New York has agreed to serve as the trustee under the
indenture. The trustee will be permitted to deal with us and any of our
affiliates with the same rights as if it were not trustee. However, under the
Trust Indenture Act, if the trustee acquires any conflicting interest and
there exists a default with respect to the notes, the trustee must eliminate
such conflict or resign.
The holders of a majority in principal amount of all outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy or power available to the trustee.
However, any such direction may not conflict with any law or the indenture,
may not be unduly prejudicial to the rights of another holder or the trustee
and may not involve the trustee in personal liability.
Book-Entry, Delivery and Form
The notes will be held through the book-entry systems operated by
Euroclear and Clearstream Banking. The notes will be represented by three
notes, in global registered form, which will represent the total principal
amount of the notes. Upon issuance, the global notes were deposited with, and
registered in the name of a nominee of the common depository for Euroclear and
Clearstream.
Each investor holds its interest in the notes through the global
notes. Transfers of beneficial interests in the global notes will be subject
to the Euroclear and Clearstream rules and procedures, which may change from
time to time. All transfers of interests in the global notes will be recorded
in accordance with the book-entry system maintained by Euroclear and
Clearstream, pursuant to customary procedures established by Euroclear and
Clearstream and their participants.
Except in the limited circumstances described below, owners of
interests in the global notes will not have notes registered in their names,
will not receive physical delivery of notes in certificated form and will not
be considered the registered owners or holders of the notes.
33
Noteholders may register the transfer and exchange of their notes at
the offices of the registrar or at the offices of the paying and transfer
agent in New York City and London.
We provide the following description of the operations and procedures
of Euroclear and Clearstream solely as a matter of convenience. Euroclear and
Clearstream control these operations and procedures and may change them from
time to time. We take no responsibility for these operations and procedures,
and we urge you to contact the clearing systems to discuss these matters.
Euroclear and Clearstream each hold securities for their account
holders. By using electronic book entry transfer between their respective
account holders, Euroclear and Clearstream facilitate the clearance and
settlement of securities transactions, and also eliminate the need for
physical movements of certificates and any risk from lack of simultaneous
transfers of securities. Euroclear and Clearstream each provide various
services, including safekeeping, administration, clearance and settlement of
internationally traded securities, and securities lending and borrowing. Each
of Euroclear and Clearstream can settle securities transactions in any of more
than 30 currencies, including the Euro. Euroclear and Clearstream each also
deal with domestic securities markets in several countries through established
depositary and custodial relationships. The respective systems of Euroclear
and Clearstream have established an electronic bridge between their two
systems across which their respective account holders may settle trades with
each other. Account holders in both Euroclear and Clearstream are world-wide
financial institutions including underwriters, securities brokers and dealers,
banks, trust companies and clearing corporations. Indirect access to both
Euroclear and Clearstream is available to other institutions that clear
through or maintain a custodial relationship with an account holder in either
system. An account holder's overall contractual relations with either
Euroclear or Clearstream are governed by the respective rules and operating
procedures of Euroclear or Clearstream and any applicable laws. Both Euroclear
and Clearstream act under those rules and operating procedures only on behalf
of their respective account holders and have no record of or relationship with
any person who is not a direct account holder.
Investors who hold accounts with Euroclear or Clearstream may
acquire, hold and transfer security entitlements with respect to the global
notes against Euroclear or Clearstream and their respective property by book
entry to accounts with Euroclear or Clearstream, each of which has an account
with the common depositary. Investors who do not have accounts with Euroclear
or Clearstream may acquire, hold and transfer security entitlements with
respect to the global notes against the securities intermediary and its
property with which those investors hold accounts by book entry to accounts
with the securities intermediary and its property, which in turn may hold a
security entitlement with respect to the global notes through Euroclear or
Clearstream. Investors electing to acquire security entitlements with respect
to the global notes through an account with Euroclear or Clearstream or some
other securities intermediary must follow the settlement procedures of their
securities intermediary with respect to the settlement of new issues of
securities. "Security entitlement" means the rights and property interests of
an account holder against its securities intermediary under applicable law in
or with respect to a security, including any ownership, co-ownership,
contractual or other rights.
Security entitlements with respect to the global notes to be acquired
through an account with Euroclear or Clearstream will be credited to that
account against payment in Euro for value as of the settlement date. Investors
electing to acquire, hold or transfer security entitlements with respect to
the global notes through an account with Euroclear, Clearstream or some other
securities intermediary other than in connection with the initial distribution
of the notes must follow the settlement procedures of their securities
intermediary with respect to the settlement of secondary market transactions
in securities.
So long as the common depositary is the registered owner or holder of
the global notes, the common depositary will be considered the sole owner or
holder of the notes represented by the global notes for all purposes under the
indenture and the notes. Accordingly, each person who owns a beneficial
interest in the global notes and who wishes to exercise any rights and
remedies of a noteholder under the indenture must rely on the procedures of
Euroclear or Clearstream, as the case may be, and their account holders.
Payments of principal and interest on the global notes will be made to the
common depositary on behalf of Euroclear or Clearstream, as the case may be,
as the registered owners of the global notes.
34
The laws of some countries and of some states in the United States
require that certain persons take physical delivery in definitive form of
securities which they own. Accordingly, the ability to transfer beneficial
interests in the global notes to those persons may be limited. Because
Euroclear and Clearstream can act only on behalf of their respective account
holders, the ability of a person having beneficial interests in the global
notes to pledge those interests to persons or entities that do not participate
in the relevant clearing system, or otherwise take actions in respect of those
interests, may be affected by the lack of a physical certificate evidencing
those interests.
We understand that under existing industry practices, if either we or
the trustee requests any action of noteholders, or if an owner of a beneficial
interest in the global notes desires to give instructions or take an action
that a noteholder is entitled to give or take under the indenture, Euroclear
or Clearstream, as the case may be, would authorize their respective account
holders owning the relevant beneficial interest to give instructions to take
that action, and those account holders would authorize intermediaries to give
instructions or to take that action, or would otherwise act on the
instructions of the intermediaries.
DESCRIPTION OF CAPITAL STOCK
Capital Stock
This section describes the general terms of our capital stock. The
capital stock and the rights of common stockholders are subject to the
applicable provisions of the General Corporation Law of the State of Delaware
and our restated certificate of incorporation.
Our authorized capital stock consists of 310,000,000 shares of Class
A Subordinate Voting Stock, par value $0.01 per share, and 90,000,000 shares
of Class B Stock, par value $0.01 per share. As of June 30, 2003, there were
48,679,796 shares of Class A Subordinate Voting Stock outstanding and
58,466,056 shares of Class B Stock outstanding (all of which shares of Class B
Stock are owned, directly or indirectly, by Magna International and are
convertible into shares of Class A Subordinate Voting Stock). See "Our
Company".
Our Class A Subordinate Voting Stock trades on the Nasdaq National
Market under the symbol "MECA" and on the Toronto Stock Exchange under the
symbol "MEC.A". Until February 26, 2003, our Class A Subordinate Voting Stock
traded on the Nasdaq National Market under the symbol "MIEC" and on the
Toronto Stock Exchange under the symbol "MIE.A". There is no market for our
Class B Stock.
Class A Subordinate Voting Stock
The holders of shares of our Class A Subordinate Voting Stock are
entitled:
o to one vote for each share of Class A Subordinate Voting Stock held
(together with the holders of our Class B Stock who are entitled to
vote at such meetings on the basis of 20 votes per share of Class B
Stock held) at all meetings of our stockholders other than meetings
of the holders of another class or series of shares;
o on a pro rata basis with the holders of our Class B Stock, to receive
any dividends (except for certain stock dividends as described below)
that may be declared by our board of directors; and
o after the payment of all our liabilities, to receive, on a pro rata
basis with the holders of our Class B Stock, all our property and net
assets available for distribution in the event of our liquidation,
dissolution or winding-up, whether voluntary or involuntary, or any
other distribution of our assets among our stockholders for the
purpose of winding-up our affairs.
Under our restated certificate of incorporation, our board of
directors may declare a simultaneous dividend payable on our Class A
Subordinate Voting Stock in shares of our Class A Subordinate Voting Stock,
and payable on our Class B Stock in shares of our Class A Subordinate Voting
Stock or in shares of our Class B Stock.
35
However, no dividend payable in shares of our Class B Stock may be declared on
shares of our Class A Subordinate Voting Stock.
The holders of shares of our Class A Subordinate Voting Stock have
additional voting rights under our corporate constitution. See "Corporate
Constitution".
Our restated certificate of incorporation provides that if the
approval of the holders of our Class A Subordinate Voting Stock voting as a
separate class is required, such approval shall be given by a majority of the
votes cast at a meeting of such holders, other than the votes attaching to our
Class A Subordinate Voting Stock beneficially owned, directly or indirectly,
by Magna International or by any person who, by agreement, is acting jointly
with Magna International or over which Magna International or any such person
exercises direct or indirect control or direction. These limitations do not
apply to any other holder of our Class A Subordinate Voting Stock.
Class B Stock
The holders of our Class B Stock are entitled:
o to 20 votes for each share of Class B Stock held (together with the
holders of our Class A Subordinate Voting Stock who are entitled to
vote at such meetings on the basis of one vote per share held) at all
meetings of our stockholders other than meetings of the holders of
another class or series of shares;
o on a pro rata basis with the holders of our Class A Subordinate
Voting Stock, to receive any dividends (except for certain stock
dividends as described below) that may be declared by our board of
directors;
o after the payment of all our liabilities, to receive, on a pro rata
basis with the holders of our Class A Subordinate Voting Stock, all
our property and net assets available for distribution in the event
of our liquidation, dissolution or winding-up, whether voluntary or
involuntary, or any other distribution of our assets among our
stockholders for the purpose of winding-up our affairs; and
o from time to time, to convert shares of our Class B Stock into shares
of our Class A Subordinate Voting Stock on a one-for-one basis.
Under our restated certificate of incorporation, our board of
directors may declare a simultaneous dividend payable on our Class A
Subordinate Voting Stock in shares of our Class A Subordinate Voting Stock,
and payable on our Class B Stock in shares of our Class A Subordinate Voting
Stock or in shares of our Class B Stock. However, no dividend payable in
shares of our Class B Stock may be declared on shares of our Class A
Subordinate Voting Stock.
None of our Class B Stock may be issued (other than in connection
with a stock dividend) without the approval by ordinary resolution of the
holders of our Class B Stock, voting as a separate class.
Holders of our Class B Stock have additional voting rights under our
corporate constitution. See "Corporate Constitution".
Amendments to Stock Provisions and Other Matters
Any amendment to our restated certificate of incorporation to add,
delete or vary any right, privilege, restriction or condition attaching to the
Class A Subordinate Voting Stock that adversely affects the rights of the
holders of Class A Subordinate Voting Stock requires the prior written
approval of the holders of all our outstanding Class A Subordinate Voting
Stock or a resolution authorized by at least two-thirds of the votes cast at a
separate meeting of the holders of the Class A Subordinate Voting Stock called
and held for that purpose (provided, however, that an amendment to create
stock ranking in priority to or on a parity with the Class A Subordinate
36
Voting Stock shall be deemed not to adversely affect the rights of the holders
of Class A Subordinate Voting Stock). It is further required that a majority
of the votes cast at such a meeting, or in any other vote by Class A
Subordinate Voting Stock holders voting as a class, not be votes attaching to
the Class A Subordinate Voting Stock beneficially owned, directly or
indirectly, by Magna International, or by any person who, by agreement, acts
jointly with Magna International or over which Magna International or any such
person exercises direct or indirect control or direction.
Any amendment to our restated certificate of incorporation to add,
delete or vary any right, privilege, restriction or condition attaching to the
Class B Stock or to create stock ranking in priority to or on a parity with
the Class B Stock requires the prior written approval of the holders of all
our outstanding Class B Stock or a resolution authorized by at least
two-thirds of the votes cast at a separate meeting of the holders of Class B
Stock called and held for that purpose.
Our Class A Subordinate Voting Stock is not redeemable, has no
preemptive or conversion rights and is not liable for further assessments or
calls. Our Class B Stock is not redeemable, has no preemptive rights and is
not liable for further assessments or calls. Each share of Class B Stock may
be converted at any time into one fully-paid share of Class A Subordinate
Voting Stock. All shares of Class A Subordinate Voting Stock offered hereby
will be fully paid and non-assessable.
Takeover Protection
Under applicable law, an offer to purchase shares of our Class B
Stock would not necessarily result in an offer to purchase shares of our Class
A Subordinate Voting Stock. Magna International, as the holder of all our
issued and outstanding Class B Stock, has entered into a trust agreement with
Computershare Trust Company of Canada (as successor to Montreal Trust Company
of Canada) and us. This trust agreement provides that the holders of our Class
A Subordinate Voting Stock will not be deprived of any rights under applicable
takeover bid laws to which they would have been entitled in the event of a
takeover bid (which may include a private offer to purchase) if our Class B
Stock and the Class A Subordinate Voting Stock were a single class of stock.
For these purposes, a takeover bid is generally defined as an offer to acquire
any of our outstanding equity or voting stock where the party making the offer
would, if the offer were accepted, own more than 20% of the shares of any
class of our stock.
Under the trust agreement, Magna International agrees not to sell any
of our Class B Stock that it owns, directly or indirectly, to any person under
circumstances in which (1) the offer is a takeover bid for purposes of Ontario
securities laws and (2) those securities laws would have required the same
offer to be made to all holders of our Class A Subordinate Voting Stock if the
offer had been made for Class A Subordinate Voting Stock rather than Class B
Stock. One circumstance where Ontario securities laws would not require the
same offer to be made to all holders of Class A Subordinate Voting Stock is
where Magna International, as the only holder of our Class B Stock, sells
shares of Class B Stock for a price not exceeding 115% of the average of the
closing prices of the Class A Subordinate Voting Stock over the 20 trading
days immediately preceding the sale.
This restriction will not apply if: (1) the sale is made pursuant to
an offer to purchase only part of the Class B Stock made to all holders of our
Class B Stock and an identical offer in all material respects is made
concurrently to purchase our Class A Subordinate Voting Stock, which identical
offer has no condition attached other than the right not to take up and pay
for shares tendered if no shares are purchased pursuant to the offer for Class
B Stock; or (2) there is a concurrent unconditional offer to purchase all our
Class A Subordinate Voting Stock at a price per share at least as high as the
highest price per share paid pursuant to the takeover bid for the Class B
Stock.
The trust agreement contains provisions for the authorization of
action by the trustee to enforce the rights of the holders of our Class A
Subordinate Voting Stock. The trustee only has to enforce these rights if
either we or the holders of our Class A Subordinate Voting Stock agree to pay
the trustee's costs and to indemnify the trustee. A holder of our Class A
Subordinate Voting Stock is not entitled to take action unless the trustee
refused to act after a request to do so by holders of at least 10% of our
outstanding Class A Subordinate Voting Stock.
37
The trust agreement prohibits Magna International from disposing of
any shares of our Class B Stock unless the disposition is conditional upon the
person acquiring those shares becoming a party to the trust agreement.
Conversion of Class B Stock into Class A Subordinate Voting Stock and the
subsequent sale of that Class A Subordinate Voting Stock is excluded from this
prohibition.
The trust agreement provides that it may not be amended and material
provisions cannot be waived, without the approval of the Toronto Stock
Exchange and at least two-thirds of the votes cast by the holders of the Class
A Subordinate Voting Stock. The two-thirds majority must include a simple
majority of the votes cast by holders of the Class A Subordinate Voting Stock,
excluding any of our principal stockholders and their affiliates and any
persons who have an agreement to purchase Class B Stock on terms that would
constitute a sale for the purposes of the trust agreement.
The trust agreement does not prevent the holder of our Class B Stock
from:
o granting a security interest in shares of our Class B Stock in
connection with a bona fide borrowing, provided that the secured
party concurrently agrees in writing to become a party to the trust
agreement; or
o selling, transferring or otherwise disposing of all or any of the
shares of our Class B Stock to a company controlled by or under
common control with the holder, provided that the transferee
concurrently agrees in writing to become a party to the trust
agreement.
No provision of the trust agreement limits the rights of any holder
of our Class A Subordinate Voting Stock under any applicable securities
legislation.
38
CORPORATE CONSTITUTION
We have adopted certain organizational and operating policies and
principles used by Magna International to define the rights of employees and
investors to participate in profits and growth and to impose discipline on
management, some of which have been embodied in our corporate constitution.
The following description summarizes the material terms and provisions of our
corporate constitution, which cannot be amended or varied without the prior
approval of the holders of a majority of our Class A Subordinate Voting Stock
(not including shares held by Magna International or any person who, by
agreement, is acting jointly with Magna International or over which Magna
International or any such person exercises direct or indirect control or
direction) and our Class B Stock, each voting as a separate class.
Board of Directors
Our corporate constitution provides that, unless otherwise approved
by the holders of our Class A Subordinate Voting Stock and our Class B Stock,
each voting as a separate class, (1) a majority of the members of our board of
directors shall be individuals who are not our officers or our employees or
individuals related to these persons, and (2) at least two of our directors
shall be individuals who are not our officers or employees, or directors,
officers or employees of any of our affiliates, including Magna International,
nor persons related to any such officers, employees or directors.
Employee Profit Sharing Plan
We are currently examining the establishment of an employee profit
sharing plan pursuant to which a percentage of our pre-tax profits before
profit sharing for each fiscal year would be allocated to our employee profit
sharing plan and/or otherwise be distributed to our employees or the employees
of our subsidiaries who do not participate in a similar plan, and who do not
receive management incentive bonuses, during that year or the immediately
following fiscal year.
Required Allocations
Dividends
The holders of our common stock are entitled to receive dividends, as
and when declared by our board of directors, out of any legally available
funds as follows. In respect of our fiscal years commencing January 1, 2004
and 2005, unless otherwise approved by ordinary resolution of the holders of
each of our Class A Subordinate Voting Stock and our Class B Stock, each
voting as a separate class, the holders of our Class A Subordinate Voting
Stock and our Class B Stock will be entitled to receive and we will pay, as
and when declared by our board of directors out of funds properly applicable
to the payment of dividends, non-cumulative dividends in respect of each
fiscal year so that the aggregate of the dividends paid or payable in respect
of that year is at least equal to 10% of our after-tax profits for that fiscal
year; in respect of each fiscal year thereafter, holders of our Class A
Subordinate Voting Stock and our Class B Stock will be entitled to receive, as
and when declared by our board of directors out of funds properly applicable
to the payment of dividends, non-cumulative dividends in respect of such
fiscal year so that the aggregate of the dividends paid or payable in respect
of that year shall be equal to the greater of (1) 10% of our after-tax profits
for that fiscal year and (2) an amount such that the aggregate of the
dividends paid or payable in respect of that fiscal year and the two
immediately preceding fiscal years is at least 20% of our after-tax profits
for such three-year period.
For further information regarding dividends payable with respect to
our capital stock, see "Description of Capital Stock--Capital Stock" and
"Dividend Policy".
39
Social Objectives
Pursuant to our corporate constitution, a maximum of 2% of our annual
pre-tax profits beginning with 2004 shall be allocated to the promotion of
social objectives during each fiscal year or the immediately following fiscal
year. Social objectives are objectives that are in our executive management's
opinion of a political, patriotic, philanthropic, charitable, educational,
scientific, artistic, social or other useful nature to the communities in
which we or our affiliates operate.
Incentive Bonuses
Our corporate constitution provides that the incentive bonuses paid
or payable to our corporate management in respect of each fiscal year,
beginning with 2004, shall not, in the aggregate, exceed 6% of our pre-tax
profits before profit sharing for such fiscal year. Our executive management,
with the approval of our board of directors or a duly appointed committee of
our board, has the right to allocate the amount to be paid to individuals
within our corporate management as well as to determine the timing and manner
of payment (whether in cash or in our shares or otherwise).
Authorized Capital Stock
Our corporate constitution provides that no resolution of our board
of directors purporting to:
o increase the maximum number of authorized shares of any class of
our stock; or
o create a new class or series of stock having voting rights of any
kind (other than on default of payment of dividends) or having rights
to participate in our profits in whatever manner (other than a class
or series convertible into existing classes of stock or a class or
series of stock having a fixed dividend or a dividend determined
without regard to profits);
shall be effective unless such resolution is approved by ordinary resolution
of the holders of each of our Class A Subordinate Voting Stock and our Class B
Stock voting separately as a class.
40
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the material U.S. federal income tax
consequences of the purchase, ownership and disposition of the notes and the
shares of Class A Subordinate Voting Stock issuable upon conversion of the
notes (each, a "Security" and collectively the "Securities"). This summary is
based on the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
administrative pronouncements, judicial decisions and existing and proposed
Treasury Regulations, all of which are subject to change which change may be
on a retroactive basis. This summary discusses only the principal U.S. federal
income tax consequences to those beneficial owners ("Holders") who purchase
the notes in the initial offering at their "issue price", as defined in
Section 1273 of the Code, and who hold the Securities as capital assets within
the meaning of Section 1221 of the Code. This summary does not address the tax
treatment of Holders that may be subject to special tax rules, including
certain financial institutions, insurance companies, dealers in securities or
foreign currencies, U.S. persons whose functional currency (as defined in
Section 985 of the Code) is not the U.S. dollar, U.S. persons holding the
Securities as part of a hedging, conversion, constructive sale or other
integrated transaction, and subsequent purchasers of a Security. Persons
considering the purchase of a Security should consult their tax advisors with
regard to the application of the United States and other income tax laws to
their particular situations.
For purposes of this discussion, "U.S. Holder" means a Holder of a
Security that is (i) a citizen or resident of the United States, (ii) a
corporation created or organized under the laws of the U.S. or any political
subdivision thereof, (iii) an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, (iv) a trust if (A) the
administration of the trust is subject to the primary supervision of a court
within the United States and one or more United States persons have the
authority to control all of its substantial decisions or (B) it was in
existence on August 20, 1996 and has elected to continue to be treated as a
United States trust or (v) any Holder that otherwise is subject to U.S.
federal income taxation on a net income basis in respect to a Security. If a
partnership (including for this purpose any entity treated as a partnership
for U.S. federal income tax purposes) is a beneficial owner of any notes or
shares of Class A Subordinate Voting Stock, the treatment of a partner in that
partnership will generally depend on the status of such partner and the
activities of such partnership. For purposes of this discussion, a "Non-U.S.
Holder" means any Holder of a Security that is not a U.S. Holder.
U.S. Holders
The following is a summary of the material U.S. federal income tax
consequences with respect to the purchase, ownership and disposition of the
Securities by U.S. Holders.
Interest
Interest paid on a note will generally be taxable to a U.S. Holder as
ordinary income at the time the interest is received or accrued in accordance
with such U.S. Holder's method of tax accounting.
Sale, Exchange, Redemption, Retirement or Other Disposition of the
Notes
Upon the sale, exchange, redemption, retirement or other disposition
of a note other than conversion into shares of Class A Subordinate Voting
Stock, a U.S. Holder generally will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption,
retirement or other disposition (not including any amount attributable to
accrued but unpaid interest) and such U.S. Holder's adjusted tax basis in the
note. Any such gain or loss will generally be capital gain or loss and will be
long-term capital gain or loss if, at the time of disposition, the note was
held for more than one year.
Constructive Dividends Upon Adjustment of Conversion Price
The conversion price of the notes may be adjusted under certain
circumstances. Section 305 of the Code treats certain actual or constructive
distributions of stock with respect to stock or convertible securities as a
distribution taxable as a dividend, to the extent of the Company's current or
accumulated earnings and profits.
41
Under applicable Treasury Regulations, an adjustment of the conversion price
may, under certain circumstances, be treated as a constructive dividend to the
extent that it increases the proportional interest of a U.S. Holder of a note
in fully diluted shares of Class A Subordinate Voting Stock, whether or not
the Holder ever converts the note into such stock. Generally, a U.S. Holder's
tax basis in a note will be increased by the amount of any constructive
dividend. Similarly, a failure to adjust the conversion price of the notes to
reflect a stock dividend or similar event could give rise to constructive
dividend income to U.S. Holders of shares of Class A Subordinate Voting Stock
in certain circumstances.
Conversion into Shares of Class A Subordinate Voting Stock
No gain or loss will generally be recognized for U.S. federal income
tax purposes on conversion of the notes solely into shares of Class A
Subordinate Voting Stock, except with respect to any cash received in lieu of
a fraction share of a Class A Subordinate Voting Stock or any accrued interest
not previously included in the U.S. Holder's income. The tax basis for the
shares of Class A Subordinate Voting Stock received upon conversion will be
equal to the adjusted tax basis of the converted notes (exclusive of any tax
basis allocable to a fractional share), and the holding period of such shares
of Class A Subordinate Voting Stock will generally include the holding period
of such notes.
Upon conversion by the Company of the notes into Class A Subordinate
Voting Stock, cash received in lieu of a fractional share of Class A
Subordinate Voting Stock will generally be treated as a payment in exchange
for such fractional share. The receipt of such cash will generally result in
gain or loss measured by the difference between the cash the U.S. Holder
received for the fractional share and the U.S. Holder's adjusted tax basis
allocable to the fractional share.
Dividends on Shares of Class A Subordinate Voting Stock
Distributions made to a U.S. Holder with respect to shares of Class A
Subordinate Voting Stock up to the amount of the Company's current or
accumulated earnings and profits will generally be taxable as ordinary
dividend income. Provided certain conditions are met, U.S. Holders that are
corporations should be entitled to the dividends-received deduction with
respect to amounts treated as ordinary dividend income. To the extent in
excess of the Company's current or accumulated earnings and profits, such
distributions will first be treated as a tax-free return of capital to the
extent of the U.S. Holder's tax basis in the shares of Class A Subordinate
Voting Stock with respect to which the distribution was made, and thereafter
as a gain from the sale or exchange of such shares of Class A Subordinate
Voting Stock.
Disposition of Shares of Class A Subordinate Voting Stock
Upon a sale or exchange of shares of Class A Subordinate Voting
Stock, a U.S. Holder will recognize gain or loss equal to the difference
between the amount realized on such sale or exchange and the U.S. Holder's
adjusted tax basis in such shares of Class A Subordinate Voting Stock. Any
such gain or loss will generally be capital gain or loss and will be long-term
capital gain or loss if, at the time of disposition, the shares were held for
more than one year.
42
Information Reporting and Backup Withholding
A U.S. Holder may be subject to U.S. information reporting with
respect to interest paid on the notes, to dividends paid on the shares of
Class A Subordinate Voting Stock and to cash proceeds from the sale, exchange,
redemption, or retirement or other disposition of the notes or sale or
exchange of the shares of Class A Subordinate Voting Stock, unless such U.S.
Holder is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact. A U.S. Holder that is subject to U.S.
information reporting generally will also be subject to U.S. backup
withholding tax unless such U.S. Holder provides certain information to the
Company or its agent, including a correct taxpayer identification number and a
certification that it is not subject to backup withholding. A U.S. Holder that
does not comply with these requirements may be subject to certain penalties.
Any amounts withheld from a payment to a U.S. Holder under the backup
withholding provision is generally creditable against the U.S. Holder's
federal income tax liability.
Non-U.S. Holders
The following discussion is a summary of the principal U.S. federal
income consequences resulting from the purchase, ownership and disposition of
the Securities by Non-U.S. Holders.
Payment of Interest
Generally, interest income of a Non-U.S. Holder that is not
effectively connected with a U.S. trade or business will be subject to a
withholding tax at a rate of 30%, or lower rate specified by an applicable
income tax treaty. Interest income earned on the notes by a Non-U.S. Holder
will generally qualify for an exemption from U.S. income and withholding tax,
referred to as the portfolio interest exemption; provided that:
1. the interest is not effectively connected with the conduct of a trade or
business within the U.S. by the Non-U.S. Holder;
2. the Non-U.S. Holder does not actually or constructively own 10% or more
of the total voting power of all classes of the Company's stock entitled
to vote;
3. the Non-U.S. Holder is not a controlled foreign corporation that is
related to the Company through stock ownership (for this purpose, the
Holder of notes would be deemed to own constructively the Class A
Subordinate Voting Stock into which it could be converted);
4. the Non-U.S. Holder, under penalty of perjury, certifies to the Company
or its agent that it is not a U.S. person and provides its name, address
and taxpayer identification number, if applicable, or otherwise
satisfies the applicable identification requirements; and
5. the Non-U.S. Holder is not a bank receiving interest pursuant to a loan
agreement entered into in the ordinary course of its trade or business.
If a Non-U.S. Holder satisfies certain requirements, the
certification described above may be provided by a securities clearing
organization, a bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business.
The Treasury Regulations require that foreign partnerships and
certain foreign trusts must provide additional documentation which (i)
certifies the U.S. or foreign status of the individual partners, beneficiaries
or owners of the partnership or trust and (ii) provides certain information
regarding the individual partners, beneficiaries, or owners including their
names and addresses.
A Non-U.S. Holder that is not exempt from tax under these rules will
be subject to U.S. federal income tax withholding at a rate of 30% on payments
of interest, unless the interest is effectively connected with the conduct of
a U.S. trade or business of the holder or a lower treaty rate applies and, in
either case, the Non-U.S. Holder
43
provides proper certification as to the holder's exemption from withholding.
If the interest is effectively connected with the conduct of a U.S. trade or
business, it will be subject to U.S. federal income tax on net income that
applies to U.S. persons generally, and if the Non-U.S. Holder is a foreign
corporation, the interest may also be subject to a U.S. branch profits tax on
the foreign corporation's effectively connected earnings and profits at a 30%
rate, or a lower rate as may be specified by an applicable income tax treaty.
Non-U.S. Holders should consult applicable income tax treaties, which may
provide different rules. Even though effectively connected interest is subject
to income tax, and may be subject to the branch profits tax, the interest is
not subject to withholding tax if the Non-U.S. Holder delivers a property
executed IRS Form W-8ECI to the Company or its agent.
Constructive Dividends Upon Adjustment of Conversion Price
The conversion price of the notes may be adjusted in certain
circumstances. An adjustment may give rise to a deemed distribution to
Non-U.S. Holders of the notes. See "U.S. Holders - Constructive Dividends on
Notes Upon Adjustment of Conversion Price" above. In that case, the deemed
distribution would be subject to the rules below regarding withholding of U.S.
federal income tax on dividends in respect of shares of Class A Subordinate
Voting Stock. See "Dividends on Shares of Class A Subordinate Voting Stock"
below.
Conversion of the Notes
A Non-U.S. Holder generally will not be subject to U.S. federal
income tax on the conversion of a note into shares of Class A Subordinate
Voting Stock. To the extent a Non-U.S. Holder receives cash in lieu of a
fractional share of Class A Subordinate Voting Stock on conversion, that cash
may give rise to gain that would be subject to the rules described below with
respect to the sale or exchange of a note or shares of Class A Subordinate
Voting Stock.
Dividends on Shares of Class A Subordinate Voting Stock
Subject to the discussion below of backup withholding, dividends, if
any, paid on shares of Class A Subordinate Voting Stock to a Non-U.S. Holder
generally will be subject to a 30% U.S. federal withholding tax, subject to
reduction for Non-U.S. Holders eligible for the benefits of certain income tax
treaties. Dividends for this purpose may include stock distributions treated
as deemed dividends as discussed in "U.S. Holders - Constructive Dividends on
Notes Upon Adjustment of Conversion Price" above. Under the Treasury
Regulations, Non-U.S. Holders will be required to satisfy certain
certification requirements to claim treaty benefits.
If the dividends are effectively connected with the conduct of a U.S.
trade or business, they will be subject to U.S. federal income tax on net
income that applies to U.S. persons generally, and if the Non-U.S. Holder is a
foreign corporation, the dividends may also be subject to a U.S. branch
profits tax on the foreign corporation's effectively connected earnings and
profits at a 30% rate, or a lower rate as may be specified by an applicable
income tax treaty.
Gain on Disposition of the Notes and Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal
income tax or withholding tax on gain realized on the sale, exchange,
redemption or retirement of a note, or the sale or exchange of shares of Class
A Subordinate Voting Stock, unless:
1. in the case of an individual Non-U.S. Holder, that holder is present
in the United States for 183 days or more in the taxable year of the
sale, exchange, redemption or retirement and certain other
requirements are met;
2. the gain is effectively connected with the conduct of a U.S. trade or
business of the Non-U.S. Holder; or
44
3. the Non-U.S. Holder holds (or has held, during the shorter of the
five-year period prior to the sale and the period the Non-U.S. Holder
has held the Class A Subordinate Voting Stock) more than 5% of our
Class A Subordinate Voting Stock and the Company is (or has been
during such period) a "United States real property holding
corporation" for U.S. federal income tax purposes. The Company
currently may be a United States real property holding corporation.
Federal Estate Tax
The U.S. federal estate tax will not apply to notes owned by an
individual Non-U.S. Holder at the time of his or her death, provided that (1)
such Holder does not own 10% or more of the total combined voting power of all
classes of the Company's voting stock (within the meaning of the Code and the
Treasury Regulations) and (2) interest on the notes would not have been, if
received at the time of such Holder's death, effectively connected with the
Holder's conduct of a trade or business in the United States. An individual
Non-U.S. holder who owns shares of Class A Subordinate Voting Stock at the
time of his or her death, or who had made certain lifetime transfers of an
interest in shares of Class A Subordinate Voting Stock while retaining certain
powers, rights or interests in the stock, will be required to include the
value of that shares of Class A Subordinate Voting Stock in his or her gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each Non-U.S.
Holder the amount of any interest or dividends paid to that Non-U.S. Holder,
and tax withheld, if any, with respect to those payments. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which
the Non-U.S. Holder resides or is incorporated. However, U.S. backup
withholding and information reporting will not apply to payments of interest
or principal on the notes by the Company or its agent to a Non-U.S. Holder if
the Non-U.S. Holder satisfies the certification or identification requirements
described in "Non-U.S. Holders - Payment of Interest" above, unless the payor
knows or has reason to know that the Non-U.S. Holder is not entitled to an
exemption from information reporting or backup withholding tax. The payment of
the proceeds on the disposition of notes or shares of Class A Subordinate
Voting Stock to or through the U.S. office of a U.S. or foreign broker will be
subject to information reporting and backup withholding unless the owner
provides the certification described above or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of notes or
shares of Class A Subordinate Voting Stock effected outside the United States
to or through a foreign office of a broker generally will not be subject to
backup withholding or information reporting. However, if the broker is a U.S.
person or has certain connections to the United States, information reporting
requirements, but not backup withholding, will apply unless the broker has
documentary evidence in its files of the Holder's non-U.S. status and has not
actual knowledge, or reason to know, to the contrary or unless the holder
otherwise establishes an exemption.
THE FOREGOING DISCUSSION IS ONLY A SUMMARY OF CERTAIN U.S. FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION
OF NOTES OR SHARES OF CLASS A SUBORDINATE VOTING STOCK. HOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES
OF OWNERSHIP AND DISPOSITION OF NOTES OR SHARES OF CLASS A SUBORDINATE VOTING
STOCK, INCLUDING THE EFFECT OF ANY FEDERAL, STATE, LOCAL, NON-U.S. OR OTHER
TAX LAWS, AND ANY APPLICABLE INCOME OR ESTATE TAX TREATY.
USE OF PROCEEDS
We will not receive any proceeds from the sale by any selling
securityholder of the notes or the shares of Class A Subordinate Voting Stock.
45
PLAN OF DISTRIBUTION
The selling securityholders will be offering and selling all the
securities offered and sold under this prospectus. We will not receive any of
the proceeds from the offering of the notes or the shares of Class A
Subordinate Voting Stock by the selling securityholders.
However, selling securityholders may resell all or a portion of the
securities in open market transactions in reliance upon Rule 144 or Regulation
S or, in the case of the notes, Rule 144A under the Securities Act, provided
they meet the criteria and conform to the requirements of one of these rules.
We are registering the notes and shares of Class A Subordinate Voting Stock
covered by this prospectus to permit holders to conduct public secondary
trading of these securities from time to time after the date of this
prospectus. We have agreed, among other things, to bear all expenses, other
than underwriting discounts, selling commissions and legal fees, in connection
with the registration and sale of the notes and the shares of Class A
Subordinate Voting Stock covered by this prospectus.
We have been advised by the selling securityholders that the selling
securityholders may sell all or a portion of the notes and shares of Class A
Subordinate Voting Stock beneficially owned by them and offered hereby from
time to time:
o directly; or
o through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, commissions or concessions
from the selling securityholders and/or from the purchasers of the
notes and shares of Class A Subordinate Voting Stock for whom they
may act as agent.
The notes and the shares of Class A Subordinate Voting Stock may be
sold from time to time in one or more transactions at:
o fixed prices, which may be changed;
o prevailing market prices at the time of sale;
o varying prices determined at the time of sale; or
o negotiated prices.
These prices will be determined by the holders of the securities or
by agreement between these holders and underwriters or dealers who may receive
fees or commissions in connection with the sale. The aggregate proceeds to the
selling securityholders from the sale of the notes or shares of Class A
Subordinate Voting Stock offered by them hereby will be the purchase price of
the notes or shares of Class A Subordinate Voting Stock less discounts and
commissions, if any.
The sales described in the preceding paragraph may be effected in
transactions:
o on any national securities exchange or quotation service on which the
notes or shares of Class A Subordinate Voting Stock may be listed or
quoted at the time of sale, including the Nasdaq National Market and
the Toronto Stock Exchange in the case of our shares of Class A
Subordinate Voting Stock;
o in the over-the counter market;
o in transactions otherwise than on such exchanges or services or in
the over-the-counter market; or
46
o through the writing of options.
These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of
the trade.
In connection with sales of the notes and shares of Class A
Subordinate Voting Stock or otherwise, the selling securityholders may enter
into hedging transactions with broker-dealers. These broker-dealers may in
turn engage in short sales of the notes and shares of Class A Subordinate
Voting Stock in the course of hedging their positions. The selling
securityholders may also sell the notes and shares of Class A Subordinate
Voting Stock short and deliver the notes and shares of Class A Subordinate
Voting Stock to close out short positions, or loan or pledge the notes and
shares of Class A Subordinate Voting Stock to broker-dealers that in turn may
sell the notes and shares of Class A Subordinate Voting Stock.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes and the shares of Class
A Subordinate Voting Stock by the selling securityholders. Selling
securityholders may not sell any, or may not sell all, of the notes and the
shares of Class A Subordinate Voting Stock offered by them pursuant to this
prospectus. In addition, we cannot assure you that a selling securityholder
will not transfer, devise or gift the notes and the shares of Class A
Subordinate Voting Stock by other means not described in this prospectus. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144, Rule 144A or Regulation S of the Securities Act may be
sold under Rule 144, Rule 144A or Regulation S rather than pursuant to this
prospectus.
The outstanding shares of Class A Subordinate Voting Stock are listed
for trading on the Nasdaq National Market and the Toronto Stock Exchange.
The selling securityholders and any broker and any broker-dealers,
agents or underwriters that participate with the selling securityholders in
the distribution of the notes or the shares of Class A Subordinate Voting
Stock may be deemed to be "underwriters" within the meaning of the Securities
Act. In this case, any commissions received by these broker-dealers, agents or
underwriters and any profit on the resale of the notes or the shares of Class
A Subordinate Voting Stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. In addition, any profits
realized by the selling securityholders may be deemed to be underwriting
commissions under the Securities Act. To the extent the selling
securityholders may be deemed to be underwriters, the selling securityholders
may be subject to statutory liabilities, including, but not limited to,
liability under Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
Because the selling securityholders may be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act, they will be
subject to the prospectus delivery requirements of the Securities Act. At any
time a particular offer of the securities is made, a revised prospectus or
prospectus supplement, if required, will be distributed which discloses:
o the name of the selling securityholders and any participating
underwriters, broker-dealers or agents;
o the aggregate amount and type of securities being offered;
o the price at which the securities were sold and other material terms
of the offering;
o any discounts, commissions, concessions or other times constituting
compensation from the selling securityholders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers;
and
o that the participating broker-dealers did not conduct any
investigation to verify the information in this prospectus or
incorporated in this prospectus by reference.
A prospectus supplement or a post-effective amendment will be filed with the
SEC to reflect the disclosure of
47
additional information with respect to the distribution of the securities.
The notes were issued and sold in June 2003 in transactions exempt
from the registration requirements of the Securities Act to persons reasonably
believed by the initial purchasers to be "qualified institutional buyers," as
defined in Rule 144A under the Securities Act or in offshore transactions
pursuant to Regulation S under the Securities Act. We have agreed to indemnify
the initial purchaser and each selling securityholder, and each selling
securityholder has agreed to indemnify us, our directors, our officers who
sign the registration statement to which this prospectus relates and each
person, if any, who controls MEC within the meaning of the Securities Act,
against specified liabilities arising under the Securities Act.
The selling securityholders and any other person participating in
such distribution will be subject to the Exchange Act. The Exchange Act rules
include, without limitation, Regulation M, which may limit the timing of
purchases and sales of any of the notes and the underlying shares of Class A
Subordinate Voting Stock by the selling securityholders and any such other
person. In addition, Regulation M of the Exchange Act may restrict the ability
of any person engaged in the distribution of the notes and the underlying
shares of Class A Subordinate Voting Stock to engage in market-making
activities with respect to the particular notes and the underlying shares of
Class A Subordinate Voting Stock being distributed for a period of up to five
business days prior to the commencement of distribution. This may affect the
marketability of the notes and the underlying shares of Class A Subordinate
Voting Stock and the ability of any person or entity to engage in
market-making activities with respect to the notes and the underlying shares
of Class A Subordinate Voting Stock.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to these documents. The information incorporated by reference
is an important part of this prospectus, and the information that we file
later with the SEC will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
until the selling securityholders sell all the securities described in this
prospectus:
o Our Annual Report on Form 10-K for the year ended December 31, 2002,
dated March 28, 2003.
o Our Proxy Statement filed pursuant to Section 14(a) of the Exchange Act
on March 28, 2003.
o Our Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2003.
o Our Current Reports on Form 8-K dated February 25, 2003, April 24, 2003,
May 1, 2003, May 22, 2003, June 3, 2003, June 18, 2003, June 24, 2003 and
July 15, 2003, respectively, and on Form 8-K/A dated February 10, 2003.
You may request a copy of these filings (other than an exhibit to a
filing unless that exhibit is specifically incorporated by reference into that
filing) at no cost, by writing or telephoning us at the following address:
Magna Entertainment Corp.
337 Magna Drive
Aurora, Ontario L4G 7K1
Canada
Attention: Corporate Secretary
(905) 726-2462
You should rely only on the information incorporated by reference or
provided by us in this prospectus. We have not authorized anyone else to
provide you with different information. We are only offering these securities
in states and provinces where the offer is permitted. You should not assume
that the information in this prospectus
48
is accurate as of any date other than the date on the front of this document.
LEGAL MATTERS
Certain legal matters in connection with the notes and the shares of
Class A Subordinate Voting Stock will be passed upon by Sidley Austin Brown &
Wood LLP, our special United States counsel.
EXPERTS
The financial statements incorporated into this prospectus by
reference to our Annual Report on Form 10-K for the year ended December 31,
2002 have been so incorporated in reliance on the reports of Ernst & Young
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC and with the Canadian securities regulatory
authorities. Our SEC filings are available at the SEC's website on the World
Wide Web at http://www.sec.gov. You may also read and copy any document we
file with the SEC at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for more information about the public reference rooms and their
copy charges. This prospectus is part of a registration statement on Form S-3
that we have filed with the SEC and does not contain all the information set
forth in the registration statement. This registration statement, including
all exhibits, has been filed with the SEC through EDGAR. The documents that we
have filed with the Canadian securities regulatory authorities are available
on the World Wide Web at http:/ /www.sedar.com. Our Class A Subordinate Voting
Stock is quoted and traded on the Nasdaq National Market and is listed on the
Toronto Stock Exchange. Reports, proxy and information statements and other
information concerning us can be inspected at the offices of the Nasdaq
National Market, 1735 K Street, N.W., Washington, D.C. 20006-1506.
49
=============================================================================== ===============================
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this MAGNA ENTERTAINMENT CORP.
prospectus in connection with the offer made hereby, and, if given or made,
such information or representations must not be relied upon as having been $150,000,000 8.55%
authorized by Magna Entertainment Corp. This prospectus does not constitute an CONVERTIBLE
offer to sell, or a solicitation of an offer to buy, the securities offered SUBORDINATED NOTES
hereby to any person in any state or other jurisdiction in which such offer or DUE JUNE 15, 2010 AND
solicitation is unlawful. Neither the delivery of this prospectus nor any sale SHARES OF CLASS A
made hereunder shall, under any circumstances, imply that information SUBORDINATE VOTING
contained herein is correct as of any time subsequent to its date or that STOCK ISSUABLE UPON
there has not been any change in the facts set forth in this prospectus or in THE CONVERSION OF THE NOTES
our affairs since the date hereof.
PROSPECTUS
- ------------------
------------
TABLE OF CONTENTS Page
OUR COMPANY.........................................2
THE OFFERING........................................2
RISK FACTORS........................................4 ___________________, 2003
FORWARD-LOOKING STATEMENTS.........................19
DIVIDEND POLICY....................................20
EARNINGS RATIOS....................................20
SELLING SECURITYHOLDERS............................21
DESCRIPTION OF THE NOTES...........................22
DESCRIPTION OF CAPITAL STOCK.......................35
CORPORATE CONSTITUTION.............................39
CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS....................................41
USE OF PROCEEDS....................................45
PLAN OF DISTRIBUTION...............................46
INCORPORATION BY REFERENCE.........................48
LEGAL MATTERS......................................49
EXPERTS............................................49
ADDITIONAL INFORMATION.............................49
============================================================================== ===============================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The following table sets forth the costs and expenses payable by us
in connection with the registration for resale of the 8.55% Convertible
Subordinated Notes due June 15, 2010 and the shares of our Class A Subordinate
Voting Stock issuable upon the conversion of the notes.
Registration fees.................................... $12,135
Accounting fees and expenses......................... $7,500
Legal fees and expenses.............................. $25,000
Miscellaneous........................................ $2,000
TOTAL...........................................$46,635
* All amounts are estimated except for the registration fees.
Item 15. Indemnification of Directors and Officers
As permitted by Section 145 of the Delaware General Corporation Law,
our by-laws require us to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that such person is or was or has
agreed to become one of our directors, officers, employees or agents, or has
agreed to serve at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
Our indemnification obligation extends to costs, charges, expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by any such person or on his or her behalf in connection
with such an action, suit or proceeding and any appeal therefrom, if any such
person acted in good faith in a manner he or she reasonably believed to be in
or not opposed to our best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. Our restated certificate of incorporation also provides that, to the
extent permitted by law, our directors will have no liability to us or our
stockholders for monetary damages for breach of fiduciary duty as a director.
Our officers and directors and the officers and directors of our subsidiaries
are covered by liability insurance, subject to a deductible for executive
indemnification. The policy does not provide coverage for losses arising from
the violation of, or the enforcement of, environmental laws and regulations.
Item 16. Exhibits
Exhibit No. Description of Document
4.1 Indenture dated as of June 2, 2003, between Magna Entertainment Corp. and The Bank of New York,
as trustee, including the form of 8.55% Convertible Subordinated Notes due June 15, 2010
5.1 Opinion of Sidley Austin Brown & Wood LLP
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP in respect of the Audited Consolidated Financial Statements of
Magna Entertainment Corp.
23.2 Consent of Sidley Austin Brown & Wood LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included as part of signature pages to this registration statement)
II-1
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(b) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration
Statement; and
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (1)(a) and (1)(b) shall not apply
if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the SEC by the Registrant pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such Post-Effective Amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a Post-Effective Amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 15
above, or otherwise, the registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
II-2
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Magna Entertainment Corp. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Aurora, Ontario, Canada, on the 25th
day of July, 2003.
MAGNA ENTERTAINMENT CORP.
By: /s/ Jim McAlpine
-----------------------------------
Jim McAlpine
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Frank Stronach, Jim McAlpine and Gary M. Cohn, and
each of them acting alone, his or her true and lawful attorney-in-fact, with
full power of substitution and resubstitution, for him and her in any and all
capacities to execute and cause to be filed with the SEC and any and all
amendments and post-effective amendments to this registration statement with
exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorney-in-fact or said
attorney-in-fact's substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities indicated on the 25th day of July, 2003.
Signature Title
- --------- -----
/s/ Jim McAlpine President and Chief Executive Officer and
- ------------------------------------------- Director (Principal Executive Officer)
Jim McAlpine
/s/ Graham J. Orr Executive Vice-President and Chief
- ------------------------------------------- Financial Officer (Principal Financial Officer)
Graham J. Orr
/s/ Douglas R. Tatters Vice-President and Controller (Principal
- ------------------------------------------- Accounting Officer)
Douglas R. Tatters
/s/ Jerry D. Campbell Director
- -------------------------------------------
Jerry D. Campbell
III-1
/s/ William G. Davis
- ------------------------------------------- Director
William G. Davis
/s/ Louis E. Lataif Director
- -------------------------------------------
Louis E. Lataif
/s/ F. Jack Liebau Director
- -------------------------------------------
F. Jack Liebau
/s/ Edward C. Lumley Director
- -------------------------------------------
Edward C. Lumley
/s/ William J. Menear Director
- -------------------------------------------
William J. Menear
/s/ Gino Roncelli Director
- -------------------------------------------
Gino Roncelli
/s/ Frank Stronach Chairman and Director
- -------------------------------------------
Frank Stronach
III-2
EXHIBIT INDEX
Exhibit No. Description of Document
4.1 Indenture dated as of June 2, 2003, between Magna Entertainment Corp. and The Bank of New York,
as trustee, including the form of 8.55% Convertible Subordinated Notes due June 15, 2010
5.1 Opinion of Sidley Austin Brown & Wood LLP
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Ernst & Young LLP in respect of the Audited Consolidated Financial Statements of
Magna Entertainment Corp.
23.2 Consent of Sidley Austin Brown & Wood LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included as part of signature pages to this registration statement)
III-3